Smart investors know to look for companies or technologies to invest in that are part of a wide infrastructure buildout. For the rise of the Internet era, stocks like Cisco and Qualcomm were practically printing money for investors as they were the backbone of the Internet and connectivity infrastructure. It’s the kind of thinking in line with the saying when there is a gold rush to invest in picks and shovels. This strategy is known as the pick and shovel play in investor circles.
With that in mind, the past 12-18 months about, investors have looked to semiconductor stocks, and specifically AMD and NVIDIA as companies that fit the pick and shovel investor play. Both AMD and NVIDIA graphics cards are critical on the backend and the front end of the blockchain movement. However, with the steep slowdown in the blockchain and crypto market, it seems these stocks are taking hits.
While NVIDIA will report earnings in November, AMD reported yesterday and continued to fuel a downward trend in semiconductor stocks. Yesterday after reporting a few positive numbers in both revenue growth and gross margin growth. However, all the positive figures for AMD were negated by weak channel inventor for graphics which was hit the most by the stall in the crypto/blockchain market. This market was strong end of 2017 and into 2018 and resellers believed the trend would continue throughout 2018. When the market stalled, and interest in crypto and blockchain wained, too much inventor was left in the channel and impacted AMD this quarter.
Broadly, however, it seems investors have turned a bit bearish on most semiconductor stocks. Which, at a high-level, is an interesting trend to unpack given there are some very positive trends for semiconductor growth ahead. But, it seems that crypto/blockchain was a bit too strong of a factor in most investors bull cases for stocks like AMD and NVIDIA.
It will be interesting to see if NVIDIA tells a similar story around crypto/blockchain impact when they report earnings. Both companies are continuing to see increases in cloud, gaming, and mix shifting to higher-end products. But the slowdown in crypto/blockchain is one of the biggest factors for negative investor sentiment as big banks continual to put our research reports that oversupply will continue to be an issue for the foreseeable future. There are a lot of picks and shovels sitting on shelves. This is a clear indicator that crypto/blockchain peaked and we will see where it goes from here.
The meta-point here is that it does appear the crypto/blockchain bubble has indeed popped. For how long, and how big the pop will be is still unknown. As I’ve written before, there is a legitimate reason to be optimistic about the blockchain, but there may be some pain and turmoil that has to happen before we see the true potential of the technology.
Lastly, the other main point that is impacting semiconductor stocks is the uncertainty of the US trade war with China. Nearly every semiconductor buy-side analyst report I read continues to cite this concern and the overall impact this trade war will have on the supply chain. This is a fair point and probably the biggest unknown factor. From nearly all vendors I’ve talked to, the trade war is a major concern issue, but many companies that are key parts of the supply chain in China are already seeking creative solutions to move some operations outside of China as they don’t want this to impact their business either.
From what I can gather, not too long after the start of 2019 we should see some clear solutions on how everyone impacted by the trade war on both sides of the Pacific ocean plan to move past this and manage through the trade war. That point also seems to suggest that companies both in the US and China don’t believe this trade war will be resolved any time soon.
