Nvidia and other U.S. semiconductor stocks are experiencing a loss of shine as investors grapple with high valuations, rising Treasury yields, and industry concerns. While the chip industry had a fantastic run in 2023, with the Philadelphia SE Semiconductor index rising over 50% by July, it seems that the momentum has slowed down.
Nvidia, which played a pivotal role in the chip industry’s success, saw its shares triple in value as excitement grew around its products’ applications in artificial intelligence. However, the recent performance of chip stocks has been lackluster. The SOX semiconductor index has declined over 7% this month, while Nvidia’s shares have dropped more than 14% in September.
The soaring valuations of semiconductor stocks are one factor contributing to the loss of momentum. By the end of July, the S&P 500 semiconductors and semiconductors equipment industry group were trading at 28.5 times forward 12-month earnings estimates, compared to the 10-year average P/E of 16.5 times. Even with the recent declines, the group still trades at a forward P/E of 23.5 times.
The rise in Treasury yields is also putting pressure on valuations. Higher yields on Treasuries, which are considered low-risk investments, provide competition for equities, which are viewed as riskier assets. With yields climbing, investors may be more inclined to move their money out of chip stocks and into Treasury bonds.
Nvidia’s recent weakness comes despite the company surpassing expectations with its revenue forecast in late August. Other major semiconductor stocks, such as Lam Research, Applied Materials, and KLA Corp, have also seen declines in September.
In addition to these factors, there are industry-specific issues impacting the semiconductor group. Ongoing tensions between the United States and China regarding semiconductors and the possibility of export controls on AI microchips are causing unease. Furthermore, Taiwan’s TSMC, the world’s top contract chipmaker, has reportedly asked its major suppliers to delay high-end chipmaking equipment delivery due to concerns about customer demand.
The initial excitement surrounding the IPO of Arm Holdings has also diminished, with the chip designer’s shares declining for the fifth consecutive day.
Despite the current setback, many chip stocks still have substantial gains for the year. Investors should look for dividend-paying chip companies with strong balance sheets and reasonable valuations. There are still opportunities in the semiconductor sector, particularly for those who prioritize long-term value.
In conclusion, the once shining semiconductor stocks, including Nvidia, are facing challenges such as high valuations, rising Treasury yields, and industry-specific concerns. While the recent decline in performance may be temporary, investors should remain cautious and seek out opportunities in chip companies with solid fundamentals.
