NVIDIA is One of the Chip Stocks Clawing Its Way Back. What Investors Should Watch for.

Semiconductor stocks have faced considerable pressure in recent weeks, but notable names are rebounding on Friday. Nvidia Corp. shares are up 2.9% in morning trading, while Advanced Micro Devices Inc. (AMD) and Micron Technology Inc. both show gains of 1.8%. This follows three consecutive sessions of declines for these companies.

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The PHLX Semiconductor Index (SOX) is also up 2.1% early in the day's trading.

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However, the sector is not out of the woods yet, according to Mizuho desk-based analyst Jordan Klein. He pointed out that the VanEck Semiconductor ETF (SMH) had declined 16% from its highs through Thursday's close, and he anticipates a further 5% to 7% downside for the sector.

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“It’s hard to feel confident that the worst is over and it’s time to buy semiconductors,” Klein wrote in a Friday note to clients. “The brief reversal at the start of the week quickly failed, and we saw a rapid decline due to concerns around flat capital expenditure from Alphabet and guide-downs in auto/industrial analog and some back-end test and packaging companies.”

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Klein advised waiting for more information from upcoming earnings reports by Microsoft Corp., Meta Platforms Inc., and Amazon.com Inc., all set to report next week. He suggested that investors might want to wait even longer.

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“Personally, I prefer waiting until we get further into August and closer to Nvidia’s earnings before jumping back into broader semiconductor long positions,” he wrote. Nvidia’s earnings are scheduled for Aug. 28, and Klein believes much depends on how Nvidia’s earnings and guidance look in a month.

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In the meantime, semiconductor investors will have two significant reports within the industry next week. AMD is scheduled to report on Tuesday, followed by Intel Corp. on Thursday.

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Bernstein analyst Stacy Rasgon commented that Intel’s stock “still seems to be in no-man’s land.” He noted that Intel’s AI narrative is largely absent, with $500 million in second-half revenue being “more than zero, but not much more.”

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Regarding AMD, Rasgon mentioned that the “burgeoning AI narrative may not be living up to expectations and is somewhat offset by core business weaknesses.”

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Despite the current rebound, the semiconductor sector remains under scrutiny. Klein’s cautious stance reflects broader concerns about the sector’s volatility and the impact of broader economic factors on tech spending. The recent selloff was driven by worries about flat capital expenditures from major tech players and disappointing guidance from companies in the auto and industrial sectors.

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Investors are closely watching earnings reports from major tech firms to gauge the health of the semiconductor industry. Microsoft's, Meta's, and Amazon's upcoming earnings will provide critical insights into tech spending and the potential impact on semiconductor demand.

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Klein’s advice to wait until Nvidia’s earnings later in August underscores the importance of this key player in the semiconductor market. Nvidia’s performance and outlook could significantly influence investor sentiment and market trends in the sector.

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Intel’s upcoming report will also be a focal point for investors. Rasgon’s comments highlight the challenges Intel faces in establishing a strong AI narrative and generating substantial revenue from this area. The company’s performance will be closely watched to see if it can overcome these hurdles and present a more compelling growth story.

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AMD’s report will be another critical event. Rasgon’s observations about the AI narrative and core business weaknesses suggest that investors will be looking for signs of strength and resilience in AMD’s performance and outlook.

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In summary, while semiconductor stocks are showing signs of recovery, the sector remains fraught with uncertainty. Key earnings reports in the coming weeks will be crucial in determining the market’s direction. Investors are advised to remain cautious and consider waiting for more clarity from these reports before making significant moves in the semiconductor space.

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