Coverage: Chip stocks fall after Nvidia issues warning

Chip stocks took a tumble Monday after Nvidia Corp. lowered its guidance for its fourth quarter 2018.

Lauren Feiner of CNBC.com had the news:

The company revised its quarterly revenue guidance from $2.70 billion to $2.20 billion due in part to “deteriorating macroeconomic conditions, particularly in China,” it said in a statement. Nvidia fell 13.8 percent on Monday.

Other chip stocks fell on the news as well. Advanced Micro Devices dropped 8 percent, and Mellanox Technologies fell more than 3 percent. Chip stocks had been on the rise just last week after four companies beat earnings expectations for the quarter. Twenty-nine out of 30 stocks on the PHLX Semiconductor Index were positive on Jan. 24, marking the index’s seventh-best day in a decade. The index fell more than 2 percent on Monday.

Nvidia’s statement Monday morning adds to growing concerns about the Chinese economy. Apple also cited slowdowns in the Chinese market when it issued its own revenue warning earlier this month.

Shannon Liao of The Verge reported that the slump in the China business was a surprise:

While Nvidia expected the losses from cryptocurrency, China’s weakening economy was more of an unexpected twist. China’s economy has hurt companies from Apple to Samsung, and Nvidia is only the latest company to cite it as a source of strife. The Chinese economy has slowed, with the government injecting a record $83 billion in cash on January 16th in hopes of combating the weak growth. Given the country’s penchant for PC gaming, the slowdown has directly impacted Nvidia’s sales.

China has been here before, but last time, it was here with the rest of the world. During the 2008 global recession, the Chinese government responded by flooding the economy with cash, which successfully boosted growth rates while also creating large debt. This time, officials aren’t resorting to such extreme tactics, hoping that measures like tax cuts and rail projects will play a role in saving the economy. China’s financial woes are also worsened by the ongoing tariff war with the US.

In addition, fewer consumers than expected bought higher-end GPUs that used Nvidia’s new Turing architecture. According to Nvidia, many likely waited for the GPUs to grow cheaper or for even newer and more advanced models to come out. “Q4 was an extraordinary, unusually turbulent, and disappointing quarter,” said Jensen Huang, founder and CEO of Nvidia in a statement.

Therese Poletti of MarketWatch.com wrote that Nvidia’s news shows that the cloud boom is dying:

For the rest of tech, the concern should continue to be that we could be seeing the first signs of the death of the cloud boom. While investors are now seeing a triple whammy of issues in the semiconductor sector — the slowing Chinese economy, due in part to tariffs, spilling across the globe; an inventory build-up of memory chips; and corporate customers getting indecisive about spending on infrastructure — the data-center slowdown has the most potential for serious near-term damage.

Semiconductor companies are good indicators of demand in many sectors of the economy, and many analysts have been warning that a downturn in chips is indicative of demand slowing in other parts of tech and the global economy. The data center in particular, while notoriously up and down in terms of demand, has been a strong driver of growth for tech.

“The data-center slowdown is largely a digestion of huge cloud capex spending [over the] past 18 months,” said Chad Kusserow, a fund manager in charge of his family office, in an email. He noted that he believes many of Nvidia’s issues are company specific. “Nvidia’s large co-specific issues trace back to the boom and bust in crypto: lots of those cards that were bought for mining finding their way back into the market. Why pay up for Turing when many cheap, good-enough options [are] available?”