Yesterday, stocks took a slug to the chin by volatile semiconductor stocks after being jabbed by a reminder of weakness in US manufacturing. Loan delinquency expectations are on the climb, according to a Fed report, out yesterday.
All shapes and sizes. Has someone ever had the gall to ask you which of your children you love best? I am sure you have been asked that question and struggled to find an answer. You dug deep to realize that, of course, you love all your children, but each one… differently. WHY? Because they are all different… OBVIOUSLY. It also happens to be the answer that is least likely to require a kid to need therapy later in life 🤣. If you are a parent, an aunt, uncle, godparent, or a caregiver you know that each child is unique, requires different types of attention, and cannot all be judged by the same metrics. This is obvious and it can be applied to almost everything in life. You know, the old “apples to apples” adage. Why then is it so hard for investors to realize that all companies are different?
I talked about this concept a bit in yesterday’s morning note. In fact, I even used NVIDIA and Micron as examples of two very different companies, but yesterday’s note was about digging one layer deeper on Bank Of America’s earnings announcement. Why do I use NVIDIA so much in my examples? Well, it’s not because it is my favorite child (it isn’t); it is because everyone is captivated with its recent success, and it happens to be a good example of a company getting things right… in the right place… at the right time.
Have you heard that the markets fell yesterday, dragged down by tech shares, specifically semiconductor stocks? It all started with a blunder by ASML, a Dutch company in the semiconductor industry group. Someone in the marketing department had the wrong date set on their watch and posted the companies Q3 earnings too early. By the time the blunder was realized, and the announcement was removed, it was too late. The world found out that the company’s orders missed estimated by some -50%. Viewed in a vacuum, on a web page, without any surrounding commentary, that seems pretty negative, doesn’t it? Order bookings are a good way to gauge future revenues, and remember, in the stock market we are mostly interested in the future and less so, the past (though that is important too).
Learning that ASML may be headed toward the rocks, traders naturally put pressure on not only ASML’s stock, but the entire semiconductor industry. I get it, I get it. Semics have had an epic run, carried to nosebleed heights with AI wind in their sales. The run has been so good as to make the sector an easy target for many to say, “they are overvalued.” Imagine that, coming out in public and saying that an industry that has grown by +100% in the past year is expensive (the S&P500 grew by +33 over the same period). Sometimes I get blinded by the brilliance of some of these folks. Those same brilliant folks, after learning about ASML’s results, were surely quick to say, “see, I told you so.” Some traders panicked and sold semiconductors while others used it as an excuse to take profits. The net result was a nearly -5% decline for the entire industry (the S&P500 semiconductor index). Wait, that can’t be right. Let’s have a look at this and, as usual “we start with the chart.” Check it out and then let’s wrap it up.
This chart doesn’t require any of my typical doodling. It is clear. The red line is the S&P semiconductor industry, which includes Intel (orange line) and NVIDIA (yellow line). It technically does not include ASML because it is a Dutch company, but it does include its competitors in the semiconductor materials and equipment space. Now, we know that Intel has some products in the AI space, but it is clearly far behind AI chip frontrunner NVIDIA. If you don’t agree, just look at the chart again. Intel, a fine company, is more broadly focused, making the majority of its revenues by selling traditional microprocessors. Those chips are highly complex but quite different from also the highly complex parallel processing chips made by NVIDIA. In fact, as we all learned later in the day when ASML relented and let its results live in the wild but with some commentary, the company makes equipment for what it calls “complex” semiconductors as well equipment for… er, less complex ones… LIKE INTEL. Intel has been struggling as of late and it also happens to be one of ASML’s largest customers. We learned that the decline in orders was due to less complex equipment typically ordered by… wait for it… Intel. The complex equipment used by NVIDIA continues to have strong demand, according to the company.
Ok, that is still bad news for ASML, as its future revenues will be cramped. But is it bad news for NVIDIA, Broadcom, AMD, QUALCOMM, and Skyworks (too name just a few)? Of course not, those companies are not in the same business as ASML, and their customers are not the same as Intel’s. Are you getting the message here? QUALCOMM’s biggest customer is Apple, which is also Skyworks’ biggest customer. For those two companies, we may want to see how many mobile devices Apple and Samsung are expecting to ship. And NVIDIA… well, what about their highly touted Blackwell chips, how are orders for that flagship product going? The latest intel on that (no pun intended) is that there is a 1-year waiting list for it. Oh, and to complicate things slightly, NVIDIA doesn’t even manufacture its own chips. Its largest manufacturer/supplier is TSMC… which is also ASML’s biggest customer. Maybe we should wait until we hear from TSMC tomorrow, when it announces its earnings. Its biggest customers include Apple, NVIDIA, Broadcom, Qualcomm, and AMD. It also produces chips for Intel, but Intel only represents 3.91% of the company’s revenue. Knowing all this, do you think that someone may have possibly rushed to judgement? We will have to wait until late November to hear from NVIDIA and December to hear from Broadcom, but we will hear from Apple in 2 weeks… unless someone at any of those companies accidentally posts results early.
YESTERDAY’S MARKETS
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