Worry is mounting over weak consumer spending, but that argument might be mistaken as far as Nvidia is concerned.
Nvidia (NVDA -4.20%) is falling after memory chip manufacturer Micron Technology (MU -2.95%) reported a much weaker outlook than expected for its summer quarter. Micron said there’s an oversupply of consumer electronics on the market, confirming worries that have been mounting for months that the work-from-home spending spree on new devices is coming to an end. Given that Nvidia derives more than 40% of its sales from video game graphics cards, a consumer-facing chip type, Micron’s news has many investors feeling glum.
Some stock market analysts were also quick to call out the relationship between the two companies to justify Nvidia’s fall alongside Micron. But the real reason Nvidia is sinking along with Micron might be far simpler: Many don’t fully understand the relationship between the two companies.
Micron’s consumer electronics woes
First, a few details: Micron reported a 16% year-over-year increase in sales to $8.64 billion in Q3 fiscal 2022 (the three months ended June 2). In addition, adjusted earnings per share increased 38% year over year. So far, so good — right?
The issue with stocks, though, boils down to their forward guidance. Micron expects sales of $7.2 billion at the midpoint of its forecast during Q4 fiscal 2022. That would represent a 13% year-over-year decrease in sales. Micron and other memory-chip makers are notoriously cyclical, and the next feared cyclical downturn appears to have arrived.
Micron CEO Sanjay Mehrotra had this to say on the earnings call:
Near the end of fiscal Q3, we saw a significant reduction in near-term industry bit demand primarily attributable to end demand weakness in consumer markets, including PC and smartphone. These consumer markets have been impacted by the weakness in consumer spending in China, the Russia-Ukraine war, and rising inflation around the world. COVID-19 control measures in China have exacerbated supply chain challenges for some customers, and the macroeconomic environment is also creating some caution among certain customers. Several customers, primarily in PC and smartphone, are adjusting their inventories, and we expect these adjustments to take place mostly in the second half of calendar 2022.
Micron’s problem isn’t necessarily Nvidia’s problem too
In simple terms, consumers all over the world are spending less on consumer electronics than was expected. As far as smartphones and tablets are concerned, that’s nothing to Nvidia. PCs are a different story, though, given that their graphics processing units (GPUs) show up in all sorts of desktop and laptop computers. Mehrotra added on the earnings call that Micron is projecting PC shipments to be down nearly 10% year-over-year in calendar year 2022.
This is likely to be an even bigger short-term blow to Micron than it will be to Nvidia. Memory chips are needed on a standalone basis for PCs, but memory is also a component in GPUs. You see, a GPU isn’t just a semiconductor type; it’s actually more of a computing unit made up of several chips. A GPU is assembled on a circuit board along with memory chips (which store the graphics data), interconnects, and video outputs to connect to monitors. In other words, if PC sales falter, Micron loses a lot of content revenue from the PC manufacturer as well as from its supply arrangement with Nvidia and other GPU designers. Nvidia, though, misses out on a single unit sale.
There’s another factor at play here. Some of Micron’s expected tumble in revenue is due to supply shortages of other components. These shortages are preventing higher-order manufacturers from completing the assembly of more complex computing units. Thus, just because some of Micron’s customers are ordering fewer memory chips doesn’t mean those customers are selling fewer finished products. It may simply mean they have enough memory components in inventory at the moment to complete the orders they’re working through.
Case in point: Mehrotra said that end markets such as data centers, cloud, and industrial are exhibiting relative strength. While certain customers may have briefly paused purchasing from Micron because of concerns over the economy, demand for enterprise tech hardware is a very different story than consumer electronics right now. This jibes with comments Nvidia made in late May during its quarterly update, indicating that it sees data center growth remaining intact for the rest of this year — notable given that data centers are now Nvidia’s largest end market.
Semiconductor stocks are cyclical
Of course, Nvidia’s outlook could change just as quickly as Micron’s has. The global economic recovery is coming to a screeching halt because of inflation, a hawkish U.S. Federal Reserve, war, and more. But as of right now, there’s no reason to believe Nvidia is going to get hit with the same level of cyclicality that Micron is.
Furthermore, and more importantly, while the semiconductor industry is cyclical, it is a growing cyclical industry. Mehrotra concluded his prepared remarks on the earnings call by pointing out that memory chip sales are expected to reach $330 billion by the end of this decade, up from about $150 billion in 2021. Nvidia and its various chips geared toward artificial intelligence and high-performance computing are expected to grow faster. Nvidia stock may be getting dragged down by Micron’s short-term outlook right now, but much of this seems due to a few fundamental misunderstandings. Investors may not fully understand the relationship between the two companies, the markets they serve, and how they make money (for example, Nvidia has a software component that most other chip companies don’t have).
For the sake of full disclosure, I’ll be buying this dip in Nvidia stock.
