Shares of Micron Technology (MU -6.04%), Nvidia (NVDA -7.82%) and Advanced micro-systems (AMD -8.26%) were all down with the tech sector on Monday. As of 2 p.m. ET, those shares were down 4.7%, 5.8% and 6.1%, respectively.
Each of these actions has generated great results and great advice, so why is this happening?
Last week’s inflation reading was higher than expected, raising concerns that the Federal Reserve will need to raise interest rates more aggressively to rein in prices, which could lead to a recession. Even though the chip sector is arguably in its healthiest position in history, its cyclical reputation is pushing investors to sell in droves amid recession fears.
Also, a Micron downgrade today doesn’t help matters.
On Monday, Summit Insights analyst KinNgai Chan downgraded Micron from buy to hold. Micron is one of the most cyclical stocks in the semiconductor industry, as the prices of its memory chips fluctuate based on supply and demand in the economy, leading to volatility. Recently, it has delivered very strong results and guidance as its management has outperformed its rivals. However, Chan thinks the good times may soon be over.
He says his recent channel checks revealed continued low demand for memory chips for smartphones and PCs. It’s not surprising. As the boom in personal computing devices in the pandemic era comes to an end as the economy reopens, consumers are now spending on experiences, not to mention the high food and gas prices that are weighing on household budgets. The same thesis has led analysts from Piper Sandler (PIPR -4.00%) to downgrade Micron to sell last week.
The same fears likely plague Nvidia and AMD today; both companies have exposure to PCs and games, two discretionary sectors that may see declines this year amid slowing consumer spending.
Yet while fears over consumer electronics sales have affected each of these stocks, these names also have exposure to the data center sector, which has been very strong and remains. Even Chan, in his memo, highlighted the continued strength of the data center as the transition to the cloud and artificial intelligence (AI) applications continue to grow.
Last quarter, Nvidia saw its data center segment grow 83%, with AMD‘s embedded, enterprise, and semi-custom segment, which includes its EPYC data center chips, up 88%. These numbers for the data center segment were the highest of any of these companies last quarter.
However, if there is a broader economic downturn, Chan’s fear is that data center customers could also start pulling out at some point. Although there is no sign of this now, it would affect the current pillars of strength of these companies.
Therefore, whether these stocks are now bargains or not largely depends on the all-important data center market. But before everyone panics, some analysts remain optimistic on this front. UBS (UBS -4.80%) also issued a note today, reiterating a buy rating on Micron, although the company lowered its price target to $115 from $120 previously. Even so, this is still significantly higher than the current stock price of $59.
UBS underscores the age-old strength of the data center market, as new server formats proliferate this year, requiring significantly more memory content. Analysts also pointed to the controlled growth in supply from the big memory names as capital equipment is in short supply.
Nvidia CEO Jensen Huang also noted strong visibility on data center growth during Nvidia’s recent earnings call, as recent advances in AI have driven huge demand. For its part, Micron pointed out at its recent analyst day that the data center segment is now the largest, overtaking the mobile segment in size and growing faster. By 2025, Micron sees data center chips accounting for 42% of revenue, up from 30% today, while it sees PC and mobile combined (the relevant segments today) grow to 55% of revenue 38% at that time.
Therefore, the big theme to watch is investment in data centers. If this continues, these three stocks look awfully cheap after this sell-off. But if a broader recession undoes even the strongest of secular cloud AI trends, then there could be another leg down.
Yet while the short term is unclear, in the long term – say, five to 10 years – I expect each of these stocks to do very well, due to the growth of AI applications. cloud-based tools as a necessary tool for all businesses, large and small.