What happened

Shares of major semiconductor stocks tumbled on Wednesday, as the stock market suffered another steep sell-off. Broadcom (NASDAQ:AVGO), NXP Semiconductors (NASDAQ:NXPI), and NVIDIA (NASDAQ:NVDA) were all down big, as investors grappled with the impact of the novel coronavirus pandemic.

Here's how these chip stocks fared on Wednesday:

Stock

% Change

Broadcom

(15.9%)

NXP Semiconductors

(19.4%)

NVIDIA

(6.7%)

Data source: Yahoo! Finance.

And here's how they've done over the past month:

AVGO Chart

AVGO data by YCharts

So what

A U.S. recession, and possibly a global recession, now appear inevitable as countries around the world take drastic actions to slow the spread of the novel coronavirus. In the U.S., Treasury Secretary Steven Mnuchin warned some senators on Tuesday that the unemployment rate could hit 20% if Congress fails to act.

Broadcom withdrew its full-year guidance when it reported its fiscal first-quarter results on March 12. The company sells chips that go into mobile devices, servers, networking hardware, and storage devices, and it has a sizable software business thanks to some major acquisitions.

A circuit board.

Image source: Getty Images.

The smartphone supply chain was disrupted by the virus outbreak in China, and now demand will probably drop globally as people lose jobs and hunker down at home. IDC expects smartphone shipments in China to decline by 30% in the quarter ending in March. In the United States, a decline in demand is likely as the economy falls into recession. Apple may even delay its widely expected 5G iPhone, which would deal a blow to Broadcom and other Apple suppliers.

The rest of Broadcom's business will also come under pressure this year. IDC expects worldwide IT spending to grow by just 1.4% this year under a pessimistic scenario, far below the 5.1% growth expected back in January. That pessimistic scenario may not be pessimistic enough, given the extreme measures governments are taking to contain the virus.

This is all happening soon after Broadcom loaded up its balance sheet with debt to fund acquisitions. The company had cash and cash equivalents of $6.4 billion at the end of the fiscal fourth quarter, but a whopping $44.4 billion of debt.

NXP is in a similar boat, exposed to the slowdown in IT spending. But NXP is also heavily exposed to the automotive industry. Automotive is the company's largest end market, accounting for nearly half of total revenue in 2019.

Sales of vehicles could plummet as the pandemic runs its course. On Wednesday, the major U.S. automakers announced plans to temporarily close all U.S. factories. That's terrible news for any supplier to the automotive industry. And if the world enters a recession, it could take years for vehicle sales volume to recover.

NVIDIA is far more diversified today than in the past. The company still depends on PC gamers buying pricey graphics cards for a large chunk of its revenue, but it also has built a significant data center business. NVIDIA's graphics cards have become the standard for accelerating enterprise workloads.

In a recession, demand for gaming graphics cards is likely to decline, especially at the high end. Enterprise sales could come under pressure as well, given the slowdown in overall IT spending. This is happening just as rival Advanced Micro Devices has roared back, releasing its best graphics products in years.

The demand picture for NVIDIA is highly uncertain, to say the least.

Now what

The semiconductor industry is cyclical. That's easy to forget when everything is going smoothly. Exactly how bad it gets for these three chip companies is unclear. NXP may be in the worst position, given the state of the auto industry. But all three companies will suffer for a while.