More Pain Ahead for Semiconductors and Big Tech

Tech and especially semiconductor manufacturers are going through a tough time. This hard time has recently resulted in turbulent sessions on the stock market.

The result of the last five sessions on Wall Street, for example, has been particularly brutal for both sectors.

Take manufacturers of microprocessors or chips. Four of U.S largest chip makers by market cap — Nvidia  (NVDA) – Get NVIDIA Corporation Report, Intel  (INTC) – Get Intel Corporation Report, AMD  (AMD) – Get Advanced Micro Devices, Inc. Report and Micron  (MU) – Get Micron Technology, Inc. Report — together lost nearly $110 billion in market value (share value multiplied by its total outstanding shares) in a week. But the biggest drop is attributed to Nvidia, the company known for its graphics chips for gaming and artificial intelligence.

Nvidia Sees Its Market Cap Melt by $89 Billion

Nvidia’s market capitalization fell from $665.1 billion on April 1 to $576.1 billion on April 8. As you can see, the company saw some $89 billion in market value melt away in one week. The stock lost 13.45% over this period to end on April 8 at $231.19.

The disappointment is just as important for AMD, whose market value fell by just over $10 billion in one week. The company’s stock fell 7.3% over the period to end the April 8 session at $101. 

If Intel and Micron are also experiencing setbacks, it is in somewhat lesser proportions. Intel’s market cap was wiped out by around $4 billion in one week. The shares slipped 2.3% over this period to $47.02. 

As for Micron, its stock fell by more than 5% in five sessions to $72.14, which is a drop of 1% per session on average. The company lost just over $4 billion in market cap.

The question that arises is why are semiconductor manufacturers struggling?

The answer is simple: if consumers reduce their spending even a little, it could have a big negative impact on semiconductor manufacturers. In any case, it is a market that is bound to become volatile as fears of recession increase. The likelihood is high to see a decrease in demand for consumer products like electronics (smartphones, computers) and household appliances that require chips.

The semiconductor market is cyclical. When the economy is doing well, it is doing well because when consumers are confident they tend to spend. They make purchases in particular on electronic products. But when they doubt or worry, consumers tend to postpone their purchases. In these cases, the first items of expenditure affected are non-essential and non-priority purchases such as electronic. 

Unwelcome Interest Rates

In addition, employees return to the office and no longer need to spend on IT equipment at home.

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Semiconductor manufacturers, like tech companies, are also suffering from the tightening of monetary policy by the Federal Reserve. Indeed, growth stocks like Nvidia, AMD or Intel can be affected by an aggressive rise in interest rates. These interest rate hikes, intended to curb inflation, can be a blow to growth.

The Fed “will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting,” Fed governor Lael Brainard said recently.

When interest rates are high borrowing money for tech and semiconductors wanting to invest in their businesses becomes too expensive. It thus affects the future profits of these companies.

Basically, high interest rates mean relatively less profit.

Nvidia, AMD and Intel sell graphics processing units (GPUs) or hardware components (CPUs) to gamers. They are also known for selling semiconductors and systems to various industries, such as cloud servers, self-driving cars, the metaverse, artificial intelligence.

Their chips also powered most electronic devices, such as smartphones and computers.

Big Tech Is Not Spared

However, it’s almost the entire tech sector that is in pain.

Apple  (AAPL) – Get Apple Inc. Report shares have lost 2.42% in one week and are currently trading at $170.09. Microsoft stock  (MSFT) – Get Microsoft Corporation Report lost 4.02% over the period to $296.97. Alphabet  (GOOGL) – Get Alphabet Inc. Class A Report shares fell nearly 5% to $2,680.21, while Amazon  (AMZN) – Get Amazon.com, Inc. Report fell nearly 6% to $3,089.21. Tesla  (TSLA) – Get Tesla Inc Report shares are down 6% in one week to $1,025.49, while Meta Platforms (Facebook)  (FB) – Get Meta Platforms Inc. Class A Report shares fell 4.1% to $222.33.

However, there is one unknown: spending by enterprises and of cloud players. Companies can allow chip makers and tech to limit a possible drop in their revenues. Demand for semiconductors remains particularly strong in the automotive industry for example.

“As the impact of digital on lives and businesses has accelerated, semiconductor markets have boomed, with sales growing by more than 20 percent to about $600 billion in 2021,” said a report from consulting firm McKinsey. “The industry’s aggregate annual growth could average from 6 to 8 percent a year up to 2030.

“The result? A $1 trillion dollar industry by the end of the decade, assuming average price increases of about 2 percent a year and a return to balanced supply and demand after current volatility,” the report added.