The stock market began giving back some of Friday's gains on Monday, and in late-morning trading, 11:10 a.m. ET, the tech-heavy Nasdaq is down 1.1%, with semiconductor stock Nvidia (NVDA -0.01%) losing twice that -- 2.2%.
Is there a reason Nvidia is going down so much more than the rest of the tech market? Yes and no.
Investors in general seem upset by the continuing drumbeat of bad economic news -- rising inflation, rising interest rates, slowing growth in China, and a supply chain crisis that just doesn't seem to want to end. Of particular interest to Nvidia investors, though, may be a story out of Nikkei Asia this morning, which cites China's largest chipmaker, Semiconductor Manufacturing International Co. (SMIC), warning of a huge drop in demand for personal computers and smartphones.
Demand destruction in the Russian and Ukrainian markets, as well as COVID lockdowns in China itself, will make demand for "at least 200 million units of smartphones ... disappear suddenly this year," according to SMIC CEO Zhao Haijun. At the same time, the CEO said he's seeing customers of SMIC holding on to "more than five months' [worth of semiconductor chip] inventory" -- at the same time that SMIC itself is running its factories full speed to manufacture more chips.
What does all this mean for investors? First and foremost, it's important to note that this appears to be largely a China story. SMIC is describing the situation for SMIC itself, and for its customers that are largely Chinese companies selling within China itself and in Russia and Ukraine as well. But if what's happening in China turns out to be a harbinger for what will happen worldwide, then the semiconductor industry could be in a bit of a pickle.
Let's recap: Demand declining, production at 100%, and inventories high -- that sounds to me like a recipe for a glut of semiconductor chips as this cyclical industry finally turns south. Maybe this will happen only in China, but maybe it won't be contained there. And in that case, Nvidia investors should probably start preparing themselves to see average sales prices decline -- and revenues and profits with them.