What happened
Many growth stocks fell on Thursday, as investors rotated out of premium-priced companies. By the close of trading, shares of Nvidia (NVDA 3.71%), Advanced Micro Devices (AMD 1.33%), and Unity Software (U -1.06%) were down 4%, 5%, and 9%, respectively.
So what
Positive news regarding the effectiveness of booster shots against the omicron variant allowed investors to refocus on the economy's nascent recovery. A report on Thursday showed that weekly jobless claims declined to a 52-year low. But while a strong labor market is great for workers seeking jobs, some growth investors took the news as cause for concern.
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A tight labor market could lead to higher wages, which could, in turn, stoke inflation. Growth stocks are valued based primarily on their expected future earnings, discounted back to the present. When fears of higher inflation mount, investors increase the discount rate they use to value assets. Essentially, this means that a company's expected profits are worth less today and by extension, so are its shares.
Now what
Nvidia, AMD, and Unity are three of the fastest-growing businesses on the planet. So naturally, much of their stocks' value is tied to their future earnings. Thus, they're particularly exposed to changes in discount rates, and therefore, inflation. Consequently, investors can expect their share prices to be negatively impacted by any news that appears to make higher inflation more likely.
That said, while near-term price-to-earnings multiples and other valuation ratios could fluctuate due to inflation concerns, a company's true value is ultimately determined by its long-term profits and cash flows. As the leading semiconductor makers, Nvidia and AMD are poised to excel in this regard. And Unity, as an increasingly important 3D-development platform, is also well-positioned to generate impressive earnings growth in the coming decade.
