The Stocks of NVIDIA and AMD Are Not Deals in a Bear Market

Anchoring is one of the riskiest traps an investor can fall into during a bear market. Sayings like, “My stock is down 60%; it’s so cheap!” may come to mind. The issue with that kind of thinking is as follows: The peak is taken to be the “right” price. In fact, nobody is aware of the “proper” price. A stock may occasionally fall and never rise again. Sometimes it takes a long time for it to recover.

The semiconductor stocks have fallen significantly this year, but they are still expensive.

Nothing prevents a stock from plummeting another 60% after already plunging 60%. What your cost basis is doesn’t matter to the stock market. It doesn’t give a damn about the past. The future is important. Diminished growth prospects combined with inflated valuation make for a devastating drop that seemed inconceivable when everyday fresh all-time highs were being established.

The gains made by NVIDIA (NVDA -0.66%) and Advanced Micro Devices (AMD -1.22%), two semiconductor stocks that were surging until late 2021, have largely been erased as chip gluts have replaced chip shortages. Both stocks have lost about 60% of their value since their peak.

The long-term suitability of these two stocks at their current pricing is a matter of debate. But they most definitely aren’t cut-and-dried deals.

Before the pandemic, NVIDIA and AMD were both performing well. AMD was gaining market share in the PC and server CPU industries while NVIDIA dominated the market for gaming GPUs and built a successful data center GPU business targeted at artificial intelligence and other computationally heavy applications.

Both stocks were accelerated by the pandemic. PC sales increased to their highest level since 2012 as bitcoin miners snatched them up, driving graphics card prices over the roof. Shares of NVIDIA and AMD increased by 339 and 173 percent, respectively, from January 1, 2020, and November 1, 2021.

Were those protests logical? Only if you thought the frantic demand of the pandemic era represented the new norm. Since the collapse of the cryptocurrency bubble, demand for graphics cards has significantly decreased, resulting in an overstock in the market. Additionally, PC sales are plummeting. This year, unit shipments are anticipated to decline by about 10%, with the consumer side of the market suffering the most.

NVIDIA and AMD stock stocks are down 59% and 63%, respectively, from their high in late 2021. Are these opportunities to purchase? Here’s another perspective on the matter: The stocks are still up around 109% and 44%, respectively, from the start of 2020. If you anchor to the all-time highs, those steep declines create the illusion that both stocks are screaming bargains. But the truth is that both stocks are still well above their pre-pandemic levels.

Valuation is ultimately what determines whether a stock is cheap or expensive. Let’s look at the price-to-sales ratio.

Both NVIDIA and AMD trade at greatly reduced price-to-sales ratios compared to their peaks, but that doesn’t mean the stocks are cheap. The price-to-sales ratios for both stocks are now right around where they were three years ago. And the growth prospects for the companies, at least over the next year or so, are not particularly bright.

NVIDIA and AMD could very well be fine long-term investments, but they’re not bargains. Know what you’re getting yourself into if you decide to invest in these stocks. Before the pandemic, NVIDIA and AMD were both performing well. AMD was gaining market share in the PC and server CPU industries while NVIDIA dominated the market for gaming GPUs and built a successful data center GPU business targeted at artificial intelligence and other computationally heavy applications.

Both stocks were accelerated by the pandemic. PC sales increased to their highest level since 2012 as bitcoin miners snatched them up, driving graphics card prices over the roof. Shares of NVIDIA and AMD increased by 339 and 173 percent, respectively, from January 1, 2020, and November 1, 2021.

Did those rallies make sense? Only if you believed the frenzied pandemic-era demand was the new normal. The cryptocurrency bubble has since collapsed, erasing a big chunk of demand for graphics cards and putting the industry into a state of oversupply. On top of that, PC sales are tumbling. Unit shipments are expected to be down around 10% this year, with the consumer side of the industry hit the hardest.

From their peaks in late 2021, NVIDIA and AMD stocks are down 59% and 63%, respectively. Are these buying opportunities? Here’s another way to look at it: The stocks are still up around 109% and 44%, respectively, from the start of 2020. If you anchor to the all-time highs, those steep declines create the illusion that both stocks are screaming bargains. But the truth is that both stocks are still well above their pre-pandemic levels.

NVIDIA and AMD could very well be fine long-term investments, but they’re not bargains. Know what you’re getting yourself into if you decide to invest in these stocks.

Related posts

Leave a Reply

Your email address will not be published. Required fields are marked *