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What Happened?
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) fell 6.8% in the morning session as semiconductor stocks fell after ASML, the biggest supplier of equipment used in making advanced chips, pre-announced weak earnings. ASML expects fiscal year 2025 sales to come in between 30 billion euros and 35 billion euros, at the lower half of the range it had previously provided. Similarly, bookings for the quarter are reportedly below expectations. Reuters noted that the quarterly earnings numbers were mistakenly published a day earlier than expected.
Management noted that while the potential in the AI (artificial intelligence) market remained strong, other markets were taking too long to recover, with the observed trend expected to continue into 2025.
Lastly, ASML’s CFO Roger Dassen projected China’s contribution to overall revenue to be around 20% (down from the recent estimate of 49%), hinting at potential weakness in the region.
ASML’s technology is used by chipmakers like Nvidia, AMD, Intel, and Samsung to make advanced chips, including those specially designed for AI workloads. Given the company’s critical role in the semiconductor manufacturing process, the weak earnings and outlook could signal a possible softening in the industry.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Nvidia? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Nvidia’s shares are very volatile and have had 24 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 26 days ago when the stock gained 5.2% as markets roared back after an initially muted response to the Fed’s rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent). The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years.
The Fed—under Chair Jerome Powell—began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot. Looking forward, the Fed signaled that more cuts are possible in 2024/25.
Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed’s monetary policy stance, which the market has been waiting for with bated breath. If there’s anything the market doesn’t like, it’s uncertainty.
As a reminder, the driver of a stock’s value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
Nvidia is up 174% since the beginning of the year, and at $131.93 per share, it is trading close to its 52-week high of $138.07 from October 2024. Investors who bought $1,000 worth of Nvidia’s shares 5 years ago would now be looking at an investment worth $26,870.
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