After smashing performances in the first nine months of 2021, US-listed tech firms AMD (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA) have slumped in value over the past week. Indeed, Nvidia stock is off nearly 10% over the past five days. Shares in AMD have dropped by a more sedate 2%, although this is still worse than the S&P 500. The index has declined by 0.4% over the same period.
I need to put this performance into perspective. Over the past year, AMD and Nvidia have both been some of the market’s best-performing investments. The latter has returned 113% over the past 12 months, while the former has added 43%. Over the period , the S&P 500 has returned just 25% by comparison.
These companies have been riding the general boom in demand for anything technology-related in 2021.
Nvidia stock boom
Surging demand for semiconductors and graphics processors has pushed Nvidia’s profits higher by 55% in its current financial year. That is outstanding and certainly justifies some of the stock’s recent outperformance. For the third quarter of 2021, AMD’s net income jumped 137%.
The global semiconductor and chip market is incredibly tight. There are two elements behind this market environment.
Over the past two years, there has been a jump in demand for all kinds of tech. Producers are struggling to manufacture enough chips and processors to fit into these products.
As the industry has always pursued a just-in-time production model, where makers try to match supply and demand, they have struggled to keep up.
At the same time, the pandemic has accelerated trends in the technology sector.
Trillions of pounds are flowing into new technologies around the world, particularly in the areas of robotics and artificial intelligence. The pandemic has accentuated the need for these technologies, as labour shortages and staff safety have been driving investment needs.
This booming tech market has only complicated the unbalanced supply/demand picture.
These factors look set to persist for at least the next few years. That suggests the outlooks for AMD and Nvidia are highly attractive.
However, both companies’ valuations already reflect this potential, in my mind. Both corporations are selling at forward price-to-earnings (P/E) ratios of more than 40. This suggests the market is expecting a lot from these firms in the year ahead.
Unfortunately, this valuation leaves no room for error. If either of these businesses miss the market’s growth expectations, they could be punished by Wall Street.
This is the most considerable risk facing AMD and Nvidia stock right now. If either underperforms, they will face a hostile market environment. Multiple factors could cause challenges. The supply chain crisis, rising prices, and potential pandemic disruption could hurt either of their production targets.
As such, I am cautiously optimistic about the outlook for both businesses. However, I am not willing to add either of the stocks to my portfolio today, considering their valuations and the challenges that could hit growth over the next 12 months.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.