What happened
Nvidia (NVDA -3.33%) dropped in Monday trading, falling by 4.1% through 2:15 p.m. ET in response to continuing despondent news about the state of the semiconductor industry.
Reuters reported over the weekend that the ongoing conflict in Ukraine will almost certainly disrupt supplies of neon gas, which is vital for the manufacture of semiconductor chips. That sounds like it should be good news for Nvidia because if there are continued constraints on semiconductor supplies, that should push prices -- and profit margins -- higher. On the other hand, if input costs rise for Nvidia, that would squeeze its profit margins.
Image source: Getty Images.
So what
Adding to Nvidia's troubles, on Monday morning, Citigroup released a report warning of "incredibly bearish" sentiment regarding semiconductor stocks. Investors, the bank warns, are beginning to wonder if a Chinese attack on Taiwan might be imminent -- and what would happen if such an event were to cut off companies like Nvidia from their contract manufacturers on the island.
Nvidia depends on Taiwan Semiconductor Manufacturing Company (TSM -0.34%) to produce fully 50% of the chips it sells, warned Citi in its note, which was covered by StreetInsider.com. And even if the risk of a Chinese invasion of Taiwan in the near future is remote (we hope), the chance of it happening is still not zero.
Now what
Accordingly, investors need to factor that possibility into their calculations of how risky an investment in Nvidia really is. Citi thinks this is what investors have been doing as they've sold off Nvidia stock over the past three months. The bank further warns that there's "a belief" forming that "a recession [is] coming due to increasing inflation, the slowing Chinese economy, and economic impacts of the Russia/Ukraine conflict."
Should that come to pass -- even in the absence of a doomsday Taiwan scenario -- demand for semiconductors could slacken, quickly transforming what has been a global semiconductor deficit over the past two years into a surplus. Indeed, Citi already sees hints of a trend that point toward "a PC slowdown" in the second half of this year." That could depress demand for chips.
Fact is, Citi cites so many worries about what could go wrong for semiconductor companies like Nvidia that it's hard to say which specific one worries it most. One thing is clear, though: The higher the valuation of Nvidia stock (and at 63 times earnings, it's already fairly highly valued), the bigger those worries will become.
