Nasdaq Today: What's Sending Chip Stocks AMD and NVIDIA Lower Wednesday?

Stocks were largely mixed, but it was a poor day for the Nasdaq in particular.

The Nasdaq Composite (NASDAQINDEX:^IXIC) has held up better during the coronavirus bear market than many of its broader benchmark peers, as investors have generally been optimistic about the prospects for the high-growth tech stocks that make up the bulk of the biggest companies that trade on the Nasdaq. However, as investors start to look past the coronavirus crisis, investors seem to be doing some sector rotation. That sent the Nasdaq Composite lower by more than 1% at noon EDT, and the Nasdaq 100 Index was down even more.

Among the outstanding performers in the Nasdaq so far in 2020 have been NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD). NVIDIA came into Wednesday up nearly 50% year to date, and AMD had been higher by 16%. However, both stocks suffered declines of more than 5% Wednesday morning, and shareholders wonder whether the conditions that spurred them to move higher could now reverse themselves and cause headwinds going forward.

A lot of good news

For NVIDIA, the future has looked especially bright. Even with the coronavirus pandemic weighing on general business activity levels, the need for high-end technological solutions has never been greater, especially with so many people working remotely and demanding greater flexibility in how they handle their work.

Investors in NVIDIA have seen the graphics processing unit specialist's area of expertise as being in the video game industry. But NVIDIA has done a lot to diversify its business, and it's paying off in a number of interesting ways:

• Sales from NVIDIA's data center technology segment were up 80% in the first quarter of its 2021 fiscal year, more than doubling the 39% pace of overall revenue growth. That makes the segment a close No. 2 in terms of contributing to total sales, and data centers could well surpass gaming in the next few quarters.
• Artificial intelligence has become a priority item in NVIDIA's overall strategy, and the company is making progress toward meaningful wins in the space. The recent creation of a Pac-Man video game clone is just the latest evidence of NVIDIA's success story in AI.

Moreover, NVIDIA's broader strategic vision is helping support these positive trends. The acquisition of Mellanox, which closed at the beginning of the fiscal second quarter, should help its data center sales grow even faster.

AMD has also seen some big wins. NVIDIA is responsible for one of them, as it chose to use AMD processors within one of its artificial intelligence systems. More broadly, AMD is doing well at challenging rival Intel's (NASDAQ:INTC) position in the data server processor market while defending its market share against Intel's attacks effectively.

Reversal of fortune?

From a fundamental perspective, none of these favorable trends looks like it's going to end anytime soon. If anything, the importance of keeping up with cutting-edge technology is only rising in the post-COVID-19 world, as the need for remote access puts chip-intensive technology in even greater demand.

Yet shareholders need to appreciate how far these stocks have come. NVIDIA is up 2,500% in the past decade, while AMD has posted a 500% gain. Both stocks had doubled since this time last year before today's drop.

As daunting as 5% declines might seem, they're just a tiny move in relation to the success that these companies have seen. The factors supporting both AMD and NVIDIA remain in place, and that justifies sticking with the chipmakers until things change more fundamentally.