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The Chip Stock Albatross: Semiconductor Stocks Fall Short of Q2 Earnings

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Conjunction Junction … Chips Don’t Function

Great Ones, today we’re hooking up phrases and clauses that balance, like “out of the frying pan and into the fire,” or “He cut loose the sandbags, but the balloon wouldn’t go any higher.”

Getting your Schoolhouse Rock! on today, Mr. Great Stuff?

You’re darn tootin’. And it ain’t even Saturday morning… But I’m wishing it was. I could use a bowl of Captain Crunch and some Thundercats right now to get this rotten semiconductor taste outta my mouth.

In the past 24 hours, both Micron Technologies (Nasdaq: MU) and Nvidia (Nasdaq: NVDA) lowered their revenue guidance.

Nvidia slashed its Q2 sales guidance to $6.7 billion from the $8.1 billion the company expected in May. Nvidia said that a 33% drop in gaming revenue was to blame. Y’all can feel free to read “gaming revenue” as “PC sales” for Nvidia’s purposes … they’re essentially the same here.

Meanwhile, Micron announced that its Q2 sales would come in at or below the lower end of its prior expectations. That’s about $6.8 billion, give or take, and it’s well below Wall Street’s expectations for $7.28 billion in revenue. Micron also blamed slowing PC sales.

So the song remains the same for semiconductor stocks this earnings season.

Y’all might remember that on July 29, Intel (Nasdaq: INTC) said that Q3 revenue would be extremely light — like, $2 billion to $3 billion light — due to slowing PC demand.

Then on August 3, Advanced Micro Devices (Nasdaq: AMD) said it expects a 15% drop in PC sales revenue.

That said, AMD only expects to come up a couple hundred million dollars light on revenue in Q3 due to surging data center growth. Not several billion.

Eat your heart out, Intel … and everyone else in the semiconductor industry, for that matter.

Now, I like semiconductor stocks. There are few things more certain than chips and growth. They are literally in almost every single thing we buy. If it uses electricity, chances are it has a semiconductor in it somewhere.

In other words, future growth isn’t a problem for any of these companies … yes, even Intel, assuming it gets its head out of its *ahem*.

What we’re seeing right now with AMD, Nvidia, Micron, Intel … and pretty much all semiconductor stocks, is that expectations were ridiculous.

There was absolutely no way the work-from-home boom was going to continue to generate PC sales at the pandemic’s breakneck pace. It just wasn’t going to happen. Period.

And it’s not just Wall Street’s disconnected brokerage bunch that was out of touch.

I’m out of touch. You’re out of touch!

Every semiconductor company cutting guidance above — except maybe AMD — was grossly optimistic despite a flood of economic warning signs.

We’re not even talking supply chain issues anymore. We’re talking consumers better have their PC needs met, or they aren’t going to have enough disposable cash to buy anything other than food for a while.

As for today’s newest “warning” additions … I’m not too worried about Micron. Micron is one of the biggest flash memory makers on the planet, and everything needs flash memory. In other words, the economic slowdown is the only issue plaguing Micron’s growth. It will return.

But Nvidia is giving me some Intel-levels of concern. Just a little…

The company has its hands in everything from electric vehicles (EVs) to artificial intelligence to data centers to gaming graphics to crypto mining. And yet, slowing PC sales is what Nvidia is citing as the reason for its lowered guidance. And that’s a big lowering.

As we can tell from AMD, data center demand isn’t slowing down. As we can tell from literally every EV maker, demand for those isn’t slowing down.

The AI market isn’t slowing down either, though growth here will take a hit due to economic concerns and slower spending.

But then, it will be a few years before AI is a major moneymaker for any semiconductor company.

That leaves two distinct albatrosses around Nvidia’s neck … and I think we all know which one is going to hurt more.

Slowing PC sales means fewer graphics chips sold for Nvidia. This issue is cyclical and will bounce back once gamers have new games — there were only, like, three AAA titles released last year — or a little extra cash in their pockets. (More on this in a sec.)

But the real issue for Nvidia is the plunge in crypto mining.

Nvidia’s graphics cards have long been the de facto choice for crypto mining, but this so-called “crypto winter” has put a major damper on the practice. And with this latest crypto shakedown, some cryptos will emerge stronger, while others will fade into obscurity … just like Pets.com during the dot-com boom.

This is simultaneously a good thing for the crypto market, which needs to cull some rather ridiculous coins right now, and a really bad thing for Nvidia.

Fewer crypto coins being mined means fewer Nvidia graphics cards sold. This is coming whether Nvidia wants it or not, and the company really needs to double down on its other markets — AI, EVs and data centers — if it wants to maintain its dominant position in the semiconductor market.

I think it will get there, but I also think it will take a while for Nvidia to fully let go of that sweet, sweet crypto mining revenue.

So my unofficial take on today’s news is: Hold MU. Hold NVDA. Sell Intel. Buy AMD. And there you have it…

That said, if you own any Dow Jones stocks … oof. You might want to hear what Ian King uncovered.

According to Ian: Of the 30 stocks in the Dow Jones Industrial Average, 20 are headed for oblivion.

Sounds crazy, but it’s nothing new. If you went back to the DJIA in 1980, 26 of those 30 companies have either vanished or are a shadow of their former selves … Kodak, International Harvester, Sears, Woolworth’s and U.S. Steel. The list goes on and on.

In this special presentation, he’ll show you WHICH 20 stocks in the current Dow are headed for failure.

Click here to watch it for free.

Going: The Spirit Was Willing

But the earnings were weak … like, weaker than the cocktails they pour you in economy class kinda weak.

Ew, I can taste the off-brand tonic already.

You might as well finish the glass before you check out Spirit Airlines’ (NYSE: SAVE) latest report … because even a relatively “smooth” report isn’t without its turbulence when you fly Spirit.

The bright side is that Spirit saw revenue reach pre-pandemic levels — and beyond. Revenue hit $1.37 billion, about 34.9% higher than the same quarter in the 2019.

People are flying more, paying more and … oh, what’s this? … costing airlines more.

Spirit’s expenses soared 66% compared to those lofty pre-pandemic days. As such, the airline reported a loss of $0.30 per share, which is still way ahead of the $2.73 per-share loss the company reported last year, beating analysts’ estimates for a loss of $0.46 per share.

So let’s add it all up: Spirit’s making more money, but it’s still losing money too. Expenses are insane, but Spirit isn’t losing as much money as it was in the doldrums of the pandemic. Clear as mud.

Hey, at least Spirit’s getting a bit of a break now on the gas bill, all while investors half-eagerly await the JetBlue (Nasdaq: JBLU) buyout to close. And half-eagerly waiting is what Spirit customers do best.

And the waiting is the hardest part…

Going: TakeTwo … Cut … TakeThree

So, Great Stuff, you said you were gonna get back to that whole AAA gaming thing? Did you mean “today” or the fifth of never?

Hey now, Mr. Impatient, relax. I was just getting to that … courtesy of TakeTwo Interactive Software’s (Nasdaq: TTWO) latest report.

Net bookings shot up 41% to reach $1 billion, but Wall Street being Wall Street wanted $1.11 billion. Earnings came in at $0.71 per share, also missing estimates for $0.87 per share. But outlook?

Boy, outlook was where things went from worse to … umm … worse worse? Yeah, let’s go with that.

TakeTwo expects full-year revenue to land between $5.8 billion and $5.9 billion, but analysts had been hoping for a whole $6.22 billion.

CEO Strauss Zelnick admitted that the company is seeing the impact of a deteriorating economy, noting: “The business is not recession proof, or counter cyclical, or even recession resistant.”

So what is it?

It’s … complicated. But I won’t completely rule out the gaming market like Wall Street is doing, selling off TTWO and NVDA left and right over their lowered gaming guidance.

Sure, with how the economy is … or how the economy is going to be … or how people think the economy is going to be … gamers might not go for that extra graphics card upgrade from Nvidia.

But stop gaming altogether?! Oh, nay nay.

Gamers aren’t going to turn away from TakeTwo’s impressive catalog of gaming franchises, recession or no recession.

If anything, more people might turn to gaming as a somewhat cheaper form of entertainment, versus going out to the bars, losing your wallet, taking an Uber to the wrong house, insulting the wrong family and waking up to calls from your credit card company and actual family.

Umm. Are we still talking hypothetically?

Sure. Sure, we are. For investors and gamers alike? TakeTwo will live or die by its release schedule, and therein lies the rub. As long as TakeTwo can put games out, there will be gamers to play them. (Howdy. We’re out here.)

But if TakeTwo falls behind schedule, like it hints at in this latest earnings report, investors will be fuming.

Then again, if TakeTwo rushes game production and cuts some corners … which we know has never ever happened in the video game-making world … gamers will be livid, giving investors another thing to fume over.

You know what would help? GTA 6. Just sayin’.

Gone: Mulling A Musky Maneuver

Tesla (Nasdaq: TSLA) investors, the day you’ve all been waiting for is finally almost here: TSLA’s 3-for-1 stock split will officially take place on August 24, with each stockholder as of August 17 receiving two shares for every share they own. That’s … kinda how a 3-for-1 split works.

Now, normally a stock split shouldn’t actually change much but the stock price and outstanding shares … but for Tesla, that’s the whole point. Tesla relies on new retail blood — er, cash. And a lower stock price means more people might be willing to buy in (or trade TSLA options, but that’s another story).

Thing is, last time Tesla split its stock, TSLA shares rallied an insane 81% from the date of the announcement to the day the stock split. It’s unlikely for that to happen again, but also … this is Tesla. Who knows?

The stock split hubbub makes a nice cover for the sour news coming out of China, at least.

Alright! Woot! Tesla’s gonna be on fire. Wait, what did you say about China?

You know … Tesla’s disappointing sales out of China? Did you just forget about this whole past quarter?

Tesla’s China factories are on-again, off-again with the country’s Zero Covid policy and Tesla’s manufacturing upgrades. As such, production has been lumpy at best — deliveries even more so.

Tesla only delivered 28,217 vehicles in China in July, a far cry from its record of 78,906 deliveries in June. The company also took some planned downtime for upgrades at its Shanghai factory, which didn’t help the production woes in the slightest.

Honestly, TSLA investors, none of this should surprise you. The stock split, the piss-poor Chinese sales figures … none of it is a shock, and TSLA traders finally realized the inevitable today, sending the stock down 4%.

What do you think, Great Ones? Are you still holding on to Tesla? Do you think gaming will hold up through the recession? Any PC gamers out there upgrading your setups with some Nvidia or AMD greatness? (Brag up those specs, by all means!)

Whatever you want to ramble about, ramble on over to our inbox: GreatStuffToday@BanyanHill.com. Write to us!

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Regards,

Joseph Hargett
Editor, Great Stuff

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