US stock markets slumped on Tuesday after the August CPI came in at 8.3% – 30 basis points higher than what analysts were expecting, leading to several stocks, including Meta Platforms and Nvidia, falling to a 52-week low amid the turmoil.
Nvidia stock has fallen sharply since August when it lowered its guidance for the fiscal second quarter of 2023, with the slump continuing after it released the earnings. Along with slowing demand for chips, rising inflation and the US-China tech war is not helping matters for Nvidia.
The Biden administration is reportedly looking to enhance the restrictions on tech exports to China and may mandate that companies like Applied Materials, LAM Research, and KLA seek prior approval from the Commerce Department before selling any chipmaking equipment to China.
The US-China tech war has escalated in recent weeks and at the beginning of September the US barred AMD and Nvidia from selling some chips to China. The Commerce Department is reviewing policies aimed to prevent, “China’s acquisition and use of U.S. technology in the context of its military-civil fusion program to fuel its military modernization efforts, conduct human rights abuses, and enable other malign activities.”
US-China trade tensions reached their peak in 2018 under then-President Donald Trump, who imposed tariffs on billions of dollars of Chinese goods – President Joe Biden is seemingly taking a more reconciliatory tone towards China, at least when it comes to trade relations.
US-China Tech War hits Nvidia
Biden was also reportedly looking to ease the China tariffs in a bid to lower US inflation and, contrary to the claims made by Trump, the tariffs are largely borne by US consumers.
Meanwhile, Biden’s decision to halt sales of advanced chips to China over national security concerns has rattled China.
Commerce Secretary Gina Raimondo said this week: “We’re going to be implementing the guardrails to ensure those who receive CHIPS funds cannot compromise national security… They’re not allowed to use this money to invest in China; they can’t develop leading-edge technologies in China… for a period of 10 years.”
Biden has signed the CHIPS Act which seeks to spur semiconductor manufacturing capacity in the US. The Covid-19 pandemic exposed the vulnerabilities of the US supply chain and even now, the US automotive industry is suffering from the chip shortage.
There is, meanwhile, an oversupply of chips that are used in gadgets and the results are visible in Nvidia’s earnings.
Semiconductor Sales Have Been Tepid in 2022
Nvidia posted revenues of $6.7 billion in the fiscal second quarter of 2023, in line with its guidance as well as analysts’ estimates. However, its adjusted EPS of $0.51 was way below the $1.26 that analysts were expecting.
Its gaming revenues plunged 33% YoY and reached $2.04 billion, with the demand for gaming hardware falling sharply this year. It guided for revenues of $5.9 billion in the fiscal third quarter, which was over $1 billion lower than what analysts were expecting.
Nvidia blamed “challenging market conditions” and said it would adjust its pricing. Notably, global PC sales are expected to fall by as much as 10% this year while companies are left saddled with excess inventory.
Higher Inflation is a Worry for Nvidia
Higher inflation is also a worry for Nvidia as it would put further pressure on gadget sales and the US Fed is expected to raise rates by 75 basis points again later this month to tame inflation. Growth stocks have especially seen a massive sell-off amid higher inflation, while inflation in general is negative for stocks, some investing strategies can do well in inflation.
In the short term, Nvidia is facing several challenges like higher inflation, falling gadget sales, tougher comps, and the fallout of the US-China tech war.
However, most analysts are bullish on Nvidia for the long term as it is a play on multiple high-growth themes like 5G and metaverse. Several other companies would also benefit from the 5G transition.
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