The chip industry is facing structural upheavals caused by changing U.S. trade policy toward China, supply chain disruptions effectuated by Russia’s invasion of Ukraine, and prevailing recessionary fear blunting demand.

As per Semiconductor Industry Association, the global chip market contracted in October with a 4.6% decline from the prior year, driven down by the strong influence of shrinking markets in China and Asia-Pacific. In addition, according to a report by Gartner, PC sales are falling off a cliff, as worldwide PC shipments declined 19.5% in the third quarter of 2022.

While the chips sector is already bracing for waning demand as red-hot inflation squeezed spending, the pressure on the industry has been amplified further by recent regulatory action taken by the United States to curb chip export to China.

TSMC Chairman Mark Liu said: “The U.S.-China trade conflict and the escalation of cross-Strait tensions have brought more serious challenges to all industries, including the semiconductor industry.”

Furthermore, with rapid deterioration in the global economy and weakening consumer demand, Gartner expects global semiconductor revenue to decline by 3.6% in 2023.

Given the bleak outlook of the semiconductor industry, it could be wise to avoid fundamentally weak chip stocks NVIDIA Corporation (NVDA), Advanced Micro Devices, Inc. (AMD), and Wolfspeed, Inc. (WOLF) before 2023.

NVIDIA Corporation (NVDA)

NVDA is a global provider of graphics, computation, and networking technologies. The company operates through two segments: Graphics; and Compute & Networking. The company’s products are used in the gaming, professional visualization, data center, and automobile industries.

For the fiscal 2023 third quarter ended October 30, 2022, NVDA’s revenue declined 16.5% year-over-year to $5.93 billion, and its gross profit fell 31.4% year-over-year to $3.18 billion. Its total operating expenses increased 31.4% from the year-ago value to $2.58 billion, while its non-GAAP operating income declined 54.6% year-over-year to $1.54 billion.

In addition, NVDA’s non-GAAP net income and non-GAAP EPS decreased 51% and 50.4% from the previous year’s quarter to $1.46 billion and $0.58, respectively.

In terms of forward EV/Sales, NVDA is currently trading at 12.85x, 438% higher than the industry average of 2.39x. Its forward Price/Sales multiple of 12.90 is 443.8% higher than the industry average of 2.37. In addition, its forward Price/Cash Flow ratio of 50.80 is 200.5% higher than the industry average of 16.90.

Analysts expect NVDA’s EPS to decline 39.3% year-over-year to $0.80 for the fourth quarter (ending January 2023). Its revenue estimate of $6.02 billion for the current quarter is expected to decline 21.2% year-over-year. The stock has slumped 54.4% over the past year to close the last trading session at $141.21.

NVDA’s POWR Ratings reflect weak prospects. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has a D grade for Growth, Value, and Stability. It is ranked #80 out of 92 stocks in the Semiconductor & Wireless Chip industry. Click here to see the other ratings of NVDA for Momentum, Sentiment, and Quality.

Advanced Micro Devices, Inc. (AMD)

AMD operates as a global semiconductor company in Computing and Graphics; and Enterprise, Embedded, and Semi-Custom. It serves original equipment manufacturers, public cloud service providers, original design manufacturers, independent distributors, online retailers, and add-in-board manufacturers.

AMD’s non-GAAP operating expenses increased 46.9% year-over-year to $1.52 billion for the third quarter ended September 24, 2022. Its operating loss came in at $64 million compared to an operating income of $948 million in the prior year's quarter. The company’s net income amounted to $66 million, registering a decline of 92.8% year-over-year. Also, its non-GAAP EPS decreased 8.3% year-over-year to $0.67 for the same period.

In terms of forward EV/Sales, AMD is currently trading at 4.22x, 76.6% higher than the industry average of 2.39x. Its forward Price/Sales multiple of 4.34 is 82.8% higher than the industry average of 2.37x. Its forward Price/Cash Flow ratio of 22.34 compared with the industry average of 16.90.

Street expects AMD’s EPS and revenue to decrease 37.8% and 4.7%year-over-year to $0.70 and $5.61 billion for the fiscal first quarter ending March 31, 2023. Over the past year, the stock has declined 59% to close the last trading session at $63.27.

AMD's POWR Ratings reflect its poor prospects. The stock has an overall D rating, which equates to a Sell in our proprietary rating system. It has an F grade for Stability and a D for Growth and Quality. It is ranked #89 out of 92 stocks in the same industry.

Beyond what we stated above, we also have AMD’s ratings for Value, Momentum, and Sentiment. Get all AMD ratings here.

Wolfspeed, Inc. (WOLF)

WOLF is engaged in developing silicon carbide and gallium nitride technologies for power and radio-frequency applications. Its product offerings include silicon carbide and GaN materials, power devices, and RF devices targeted for various applications, such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense.

On November 16, the company announced the offering of $1,300 million of its Convertible Senior Notes due 2029. This reflects the company’s debt obligations.

WOLF’s total operating expenses increased 35.2% year-over-year to $155.60 million for the fiscal first quarter ended September 25, 2022. Its operating loss widened by 15.2% from the prior year's quarter to $75.70 million. The company’s non-GAAP net loss and non-GAAP loss per share narrowed 79.4% and 80.9% year-over-year to $4.90 million and $0.04, respectively.

In terms of forward EV/Sales, WOLF is currently trading at 8.96x, 274.9% higher than the industry average of 2.39x. Its forward Price/Sales multiple of 8.79 is 270.7% higher than the industry average of 2.37. In addition, its forward Price/Cash Flow ratio of 3,337 is significantly higher than the industry average of 16.90.

WOLF’s EPS for fiscal 2022 is expected to remain negative. The stock has lost 38.3% over the past year to close the last trading session at $69.81.

WOLF’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, which equates to a Strong Sell in our proprietary rating system.

It has an F grade for Quality and a D for Value, Stability, and Sentiment. Within the Semiconductor & Wireless Chip industry, it is ranked #90. To see the other ratings of WOLF for Growth and Momentum, click here.

NVDA shares were trading at $140.13 per share on Wednesday morning, down $1.08 (-0.76%). Year-to-date, NVDA has declined -52.31%, versus a -18.95% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

More...