Applied Materials and Nvidia post diverging revenues

With semiconductor stocks squeezed by rising costs and reduced consumer demand, Nvidia has seen a stark fall in its core gaming segment and a worrying increase in its inventory. Applied Materials, however, posted record revenues and an earnings beat. Investors will be hoping export controls to China provide future tailwinds.

- Nvidia earnings down 50% year-over-year; Applied Materials up 5%

- Cathie Wood sold over 218,000 Nvidia shares ahead of earnings

- Invesco Dynamic Semiconductors ETF falls 30% year-to-date

Semiconductor stocks such as Nvidia [NVDA] and Applied Materials [AMAT] have suffered in 2022 as supply chain challenges meet falling consumer demand in light of the fallout of Russia’s invasion of Ukraine.

Additionally, semiconductor stocks have found themselves on the frontline of the trade war between the US and China. The US implemented tech export controls on 7 October in a bid to hinder the Chinese government’s access to advanced technologies, including supercomputers used for military purposes. These controls included a limit of 400gb on the processing speed of chips exported from the US to China, precluding their use for artificial intelligence (AI).

Nvidia’s share price has fallen 46.7% in the year to date (through 18 November), while Applied Materials fell 33.2% over the same period.

Meanwhile, renowned innovation investor Cathie Wood has turned heads by dumping shares in Nvidia, long considered one of her favourite stocks. Between 20 October and 4 November, Wood’s flagship ARK Innovation ETF [ARKK] sold over 218,166 shares in Nvidia, while the ARK Next Generation Internet ETF [ARKW] sold 24,423 on 3 November.

Mixed fortunes

Nvidia reported a worrying year-over-year decline in revenues and earnings per share on 16 November. While non-GAAP earnings per diluted share of $0.58 marked a 14% increase over the previous quarter, it remains a 50% decline year-over-year and fell 15.9% short of analyst consensus expectations of $0.69.

Revenue of $5.9bn marked a 16.5% year-over-year decline and a fall of 12% from the previous quarter, although it was 2.8% above analyst expectations of $5.8bn, according to polls conducted by the Financial Times.

Nvidia’s core gaming segment fell 51%, with product inventories doubling to reflect a worrying lack of demand. Nvidia’s gross margin also narrowed from 65.20% to 55.59% year-over-year. Nvidia’s share price fell 4.75% the day of the announcement, with an earlier downgrade to guidance having enabled the markets to price in the disappointing results.

Conversely, Applied Materials announced record revenues of $6.75bn after markets closed on 17 November. Non-GAAP EPS of $2.03 marked a 5% year-over-year increase, beating analyst expectations by 17.3%. The results took Applied Materials’ full-year revenue to $25.79bn and non-GAAP EPS to $7.70.

Easing supply chain contraints

Nvidia’s founder and CEO Jensen Huang said that his company is “quickly adapting to the macro environment, correcting inventory levels and paving the way for new products”. He added that new platforms such as Ada Lovelace RTX graphics, Hopper AI computing and Orin AI modules were “off to a great start” and provide a platform for the company’s “next phase of growth”.

Gary Dickerson, Applied Materials’ president and CEO, hailed his company’s “strong finish” to the fiscal year and said that his team remains “focused on mitigating supply chain constraints.” While spending growth is set to slow, he emphasised that the company is “making the strategic investments to win the major technology inflections that will enable Applied to outgrow the semiconductor market.”

Growth is likely to continue for the semiconductor industry, albeit at a relatively modest rate. Globally, the sector is set to rise at a compounds annual growth rate (CAGR) of 6.21% from 2022 to 2031, according to a recent report by Allied Market Research. The report predicts that, in 2031, the industry will be worth over $1trn.

Funds in focus: Invesco Dynamic Semiconductors ETF

The challenges that chipmakers have faced this year is reflected in the performance of the Invesco Dynamic Semiconductors ETF [PSI], which fell 29.5% year-to-date. As of 16 November, Applied Materials is the fund’s top holding with a 5.22% weighting, while Nvidia is its seventh with a weighting of 4.72%.

Despite Nvidia’s burden on the fund this year, the Invesco Dynamic Semiconductors ETF has significantly outperformed Cathie Woods’ funds, with ARKK down 60.8% and ARKW down 62.3% over the same period.

The challenges faced by growth stocks were predicted at the start of the year by Dr. Jeff Ross, who told Opto Sessions in February that “[Wood is] going to be continually proven wrong in the short run by the market, even though in the long run, I think she’ll be vindicated. But it’s going to be a tough year for her.”

Despite her lack of enthusiasm for the stock, Nvidia is held by 377 ETFs traded on US markets. It has its largest allocation in ProShares Ultra Semiconductors [USD], composing 18.29% of the fund as of 17 November. Applied Materials has a weighting of 4.23% in the ETF, which is down 63.7% year-to-date.