CJ Muse of Evercore ISI lambasted the whole semiconductor industry as “virtually uninvestable today” in a note published by Marketwatch on Wednesday morning, and warned that the condition might linger into the second half of 2022.
What’s the problem with chip stocks, you might wonder? The story goes like this: The semiconductors industry is thriving, and most people predict it will stay expanding for as long as anybody is willing to make estimates. Nvidia’s revenue increased by 53% in the last quarter, and earnings increased by 106 percent! (Yes, you read it correctly: profit growth outpaced sales growth by a factor of two.)
And the good times are expected to continue, with analysts predicting a 42 percent increase in earnings for Nvidia in its upcoming Q1 report, followed by an uninterrupted string of improving earnings until at least 2027, when Nvidia could be earning nearly $9 a share, according to predictions compiled by S&P Global Market Intelligence, or more than twice what it earned last year.
What’s the problem with any of that? In a word, it’s this: A large part of the reason sales and profits are soaring is due to a global semiconductor scarcity, which is encouraging corporations to buy up semiconductor supply wherever they can, at practically any price.
The problem is that this can lead to surplus inventories as customers stockpile semiconductors in the hopes that demand for the goods that require them would be strong. If demand for semiconductors suddenly drops (for example, because no one wants to mine cryptocurrencies anymore, or because China shuts down its manufacturing to combat the coronavirus), firms may be stranded with surplus chips, turning the semiconductor deficit into a semiconductor glut.
Analysts predict that this will happen in the second half of 2022, when PC demand is projected to drop. And, upon hearing this, investors are understandably cautious to purchase semiconductor stocks until they know for certain whether the slowdown will occur, forcing semiconductor firms like Nvidia to lower their forecasts.
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