What happened
Although already down significantly for the year and the past week, graphics and AI chip leader Nvidia (NVDA 0.03%) was falling yet again today, down as much as 3.3% before recovering to a 0.5% decline as of 12:09 p.m. ET.
On Friday, the Biden administration came out with more sweeping limitations on semiconductors and related equipment that could be sold to China. Then today, the International Monetary Fund (IMF) cut its global growth outlook, also harming sentiment. To top things off, the Chinese government is once again locking down major cities in an effort to curb the spread of COVID-19, which has led to supply chain problems in the recent past.
In addition, analysts at Citi lowered their forecasts for Nvidia and a host of other data center-oriented chip stocks, pointing to the global growth slowdown highlighted by the IMF.
However, Nvidia was recovering by midday, as some investors may believe it has fallen far enough.
So what
On Tuesday, the IMF came out with a revised outlook for global growth, lowering its 2022 U.S. forecast to just 1.6%, down from its earlier 2.3% estimate made in July. The U.S. outlook for 2023 remained unchanged at just 1%. Both numbers were down significantly from the 5.7% growth the U.S. saw in 2021. The IMF also lowered its 2023 global growth forecast by 0.2 percentage points to 2.7%, down from 3.2% in 2022 and 6% in 2021.
That doesn't bode well for an economically sensitive sector such as semiconductors, which saw two and a half years of boom times amid the COVID-inspired digitization of the economy.
Nvidia specifically also stands to be harmed by new restrictions on sales of high-end chips to China. Although the administration had already issued an order for Nvidia to stop selling its high-end data center GPUs to China back in late August, newer restrictions on equipment sales to China last week only reinforces the technological decoupling between the two countries. Of note, Nvidia said some $400 million of revenue would be subject to the restrictions should they be fully implemented, or about 7% of guided revenue.
Also souring sentiment could be renewed China lockdowns, which have had the dual effect of dampening semiconductor demand in the country while also hurting supply chains and causing parts shortages and delays. On its August earnings call, management noted that while Nvidia's graphics chips declined due to plummeting demand for PCs and crypto mining, its underwhelming data center growth outlook was due to supply issues. Certain non-Nvidia chips needed to complete data center systems were still in short supply, making Nvidia unable to fulfill demand.
This week, China began new lockdowns that have now spread to Shanghai and other major cities ahead of the Communist Party Congress, which could cause more supply delays.
Now what
For semiconductors in 2022, it appears that everything that could go wrong, has, with the Federal Reserve raising rates extremely fast, China refusing U.S. vaccines and locking down major cities, and of course, the disruptions from the war in Ukraine.
Still, if you have a longer-term perspective, there are gems to be found amid the wreckage, and Nvidia could be one of those. By 2030, the world should be using many more chips in more devices, while semiconductors also power new applications such as artificial intelligence, autonomous driving, and the Internet of Things.
Of course, China is a big market and may be cut off from the most advanced chips. Still, the market itself should grow over the long term above GDP, making competitively advantaged companies such as Nvidia and peers look like good names to pick up amid today's wreckage.
While impossible to forecast a bottom, that could be why some investors bought today's dip, even as sell-side analysts such as Citi are cutting their earnings estimates for next year. Given Nvidia's dramatic sell-off in 2022, this may have been widely anticipated. In prior cycles, semiconductor stocks tend to bottom before earnings do, so now that investors seem to have an idea of where a bottom in earnings may lie, they may feel more comfortable stepping in.
Still, a lot of uncertainty remains for Nvidia, semiconductors in general, and the global economy.
