What happened
Shares of Advanced Micro Devices (AMD -5.78%), Qualcomm (QCOM -2.53%), and Micron Technology (MU -4.47%) fell hard on Wednesday on a terrible day for the market, down 5.6%, 6.3%, and 4.1%, respectively, as of 3:39 p.m. ET.
Although the overall market was down, these stocks were down more. Perhaps this is because all three stocks were up big yesterday, making today's bad news feel even worse.
It may seem odd these three are down, given that each of these semiconductor stocks has reported terrific earnings and profits recently amid booming chip demand. However, macroeconomic concerns, from U.S. consumer spending to China's continued lockdowns to rising interest rates, weighed on these three stocks today.
So what
You can't fault these three companies for their performance today. All three handily beat revenue and earnings estimates on their recent earnings reports, while giving strong guidance.
Each company is riding a strong wave of demand as the economy digitizes, and new applications such as 5G, artificial intelligence, and the Internet of Things (IoT) take off in earnest. Each is also operating at a high level. Advanced Micro Devices has been taking market share from Intel, while Micron has been besting its South Korean rivals in terms of leading-edge DRAM and NAND flash production. Advanced Micro Devices was even upgraded by Piper Sandler yesterday, while also receiving a price target increase from $98 to $140. The analyst said certain fears over consumer PC sales have "not played out as expected." That same analyst also reiterated his overweight rating on Qualcomm, as its newer high-growth auto and IoT businesses should outweigh concerns over mobile phone sales.
But those fears over consumer spending resurfaced today, showing that even the best-performing companies can't overcome certain macroeconomic headwinds. Earnings for Walmart and Target showed a worrying trend of tepid consumer spending and skyrocketing logistics and freight costs. These three chip companies aren't immune to those headwinds, since they must also pay to ship their chips, which are largely made in Asia, to the rest of the world.
Furthermore, while these three companies are riding strong secular tailwinds, there is also a cyclical component to them. Semiconductor companies have actually traditionally been known as cyclical companies, which will fluctuate more than the economy. While the megatrends mentioned before have muted the cyclical component, there is still some cyclical quality to them.
Today, the Walmart and Target earnings reinforced concerns over a recession this year or next year. Those earnings came on the heels of Federal Reserve Chair Jerome Powell's comments on Tuesday that "there won't be any hesitation" on the part of the Fed to raise interest rates until inflation is firmly under control. That could mean it will hike rates until the economy tips into recession. When that happens, consumer and business spending could moderate, affecting sales even of these three all-stars.
Image source: Getty Images.
Now what
The brutal start to the year may have opened up a long-term opportunity in these three tech names. While rising rates have brought down the multiples of all types of stocks, these three are performing well, generating cash, and opportunistically repurchasing stock. That could benefit shareholders long term, as each company will now be able to repurchase more shares at these lower prices.
However, I should also emphasize that is in the long term. If the U.S. can avoid a recession, these stocks look awfully cheap right now. Even in a "mild" recession, they don't look expensive; however, if we have a bad recession or depression, these stocks won't be able to escape another leg down in the markets, no matter how well they execute.
Still, over the next five years, I'd still expect each of these three stocks eventually to be much higher than they are today. So investors with a long time horizon and no need for your investment dollars in the next one to two years shouldn't hesitate to take advantage of the bargain prices for these top tech stocks today.
