Semiconductor stock Nvidia (NVDA 0.68%) suffered its second down day in a row on Wednesday, falling 3.5% through 10:30 a.m. ET.
You can blame investment bank Evercore ISI for that.
In a note covered by Marketwatch Wednesday morning, Evercore ISI analyst C.J. Muse blasted the entire semiconductor sector as "almost uninvestable today" -- and warned that this situation could persist into the second half of 2022.
What's wrong with chip stocks, you ask? Basically, the story goes like this: Business is booming in the semiconductors sector, and most folks expect it to keep booming about as far out as anyone is willing to make projections. Last quarter alone, Nvidia reported 53% sales growth -- and 106% growth in profits! (Yes, you read that right. Profit growth was literally twice as fast as sales growth.)
And the good times should keep on rolling, with analysts forecasting 42% earnings growth for Nvidia in its upcoming Q1 report due out next month, then an uninterrupted string of improving earnings all the way out to at least 2027 -- by which point Nvidia could be earning nearly $9 a share, according to predictions compiled by S&P Global Market Intelligence, or more than twice what it earned last year.
Again, what's wrong with any of that? Well, in a nutshell, it's this: A big part of the reason sales and profits are booming is because there's a global semiconductor shortage that's incentivizing companies to buy up semiconductor supplies wherever they can find them, and at almost any price. (Jefferies cites an example of "desperate customers pay[ing] $200 for a $1-2 part.")
Problem is, this can result in excess inventories, as customers hoard semiconductors on the assumption there will be demand for the products that need semiconductors. If that demand suddenly evaporates (say, because no one wants to mine cryptocurrency anymore, or because China shuts down its factories in an attempt to contain the coronavirus), then companies could end up stuck with unneeded chips -- and the semiconductor deficit transforms into a semiconductor glut.
Analysts are forecasting that this might happen in the second half of 2022, when a slowdown in PC demand is expected. And hearing this, investors are naturally hesitant to buy semiconductor stocks until they know for sure if the slowdown will arrive and semiconductor companies like Nvidia will have to reduce estimates.
This is why the stocks are considered "uninvestable" -- at least until that shoe drops in the second half of the year. It's why, despite huge projections for future growth, investors are reluctant to buy Nvidia -- and they may be right to worry.
But here's the thing: No matter what happens in 2022, if you look out a few years, Nvidia still predicts it has a $1 trillion market opportunity ahead of it, and the only way to participate in that opportunity is to buy the stock. In attempting to time the market, and only buy after the feared drop, investors run the risk of missing out on an even bigger opportunity farther down the road.