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MarketWatch First Take: Nvidia tells the truth, and tempers a potential rally for chip stocks

For months, chip companies have been telling investors that a rebound is right around the corner, with little evidence to back up those claims. Nvidia Corp. admitted as much Thursday afternoon, throwing a wet blanket on an after-hours bounceback for its beleaguered stock and shares in other chip companies. Read More...

For months, chip companies have been telling investors that a rebound is right around the corner. As MarketWatch warned months ago, there was little evidence to back up those claims, and Nvidia Corp. admitted as much Thursday afternoon, throwing a wet blanket on an after-hours bounceback for its beleaguered stock and shares in other chip companies.

Chip stocks bounced back from a weak session in extended trading Thursday afternoon, after Nvidia NVDA, +0.38%  and equipment supplier Applied Materials Inc. AMAT, +0.39%  reported earnings that beat watered-down expectations. Most of those gains were nearly erased, however, after Nvidia declined to reiterate an earlier full-year forecast and admitted that a slowdown in the data-center market, a key growth driver for the biggest names in semiconductors, is not improving and can’t really be predicted.

“The data-center spending pause around the world will likely persist in the second quarter and visibility remains low,” Chief Financial Officer Colette Kress said in a conference call Thursday, later adding “we are returning to our practice of providing revenue outlook one quarter at a time.”

Full earnings coverage: Nvidia stock rally loses steam on cloudy outlook for server chips

Immediately after that statement, a 7% after-hours gain for Nvidia shares dissipated to nearly nothing, before bouncing back to a 2% gain as the extended session neared the close. Rivals that had received an after-hours bump along with Nvidia — most notably Advanced Micro Devices Inc. AMD, +1.56%  and Intel Corp. INTC, -0.20%  — also reversed course.

Nvidia joins a chorus of chip-company executives pushing back their predictions for a huge rebound in the second half of the year as they wait for companies to “digest” previously purchased components and worry about China. Intel slashed its annual forecast last month, and after Microchip Technology Corp. MCHP, -0.84%  Chief Executive Steve Sanghi called a much-ballyhooed bottom for chips, he lightly walked that back last week amid continuing trade strife between the U.S. and China. AMD continues to be optimistic, but is only just getting back into the server game, so any gains are a win.

The reality is that this could be a temporary slowdown that will end by the time 2020 rolls around, or it could be the beginning of the end for the massive cloud data-center build-out that has supported the tech boom even as the mobile-phone market has stagnated and personal-computer sales continue to struggle. Executives continue to rely on the first option and refuse to acknowledge that the second even exists, but at least they are being more honest about how little they can reliably predict in this environment.

See also: These 15 tech stocks are backed by the quarter’s best sales figures

Nvidia obviously believes there is much more room to run in data centers, based on the big-money acquisition of Mellanox Technologies Ltd. MLNX, -1.66%  in the quarter. And it is proving that it can overcome a substantial downturn in sales due to earlier oversupply — its core gaming business appears to be in recovery from a “crypto hangover,” with revenue of more than $1 billion in the first quarter and expectations of a Nintendo Switch- and gaming laptop-fueled bounce on the horizon.

Chip companies had some really good years of late, and Nvidia’s rise has been a big part of that, but 2019 looks like a bad one. Nobody really knows when that will turn back around, but at least executives are being more honest about that.

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