Chip stocks had their worst day since 2020. Here’s what it did to one retiree’s 1,000 shares of Nvidia stock and the case for holding them or shortening them.
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Nvidia (NASDAQ: NVDA) shareholders just experienced the toughest week for chip stocks in over five years. The PHLX Semiconductor Index fell 12.25% on Thursday, its biggest one-day decline since March 2020, as investors weighed what the new Congress could mean for data center construction. Nvidia fell 9.26% that day to $181.60. On Friday, it rebounded 2.78% to close at $186.64.
Even after the rebound, Nvidia finished the week down 8.8% and sits 22% below its October 6 closing record of $239.24.
Consider a 64-year-old retiree who purchased 1,000 shares on June 10, 2024, the day Nvidia’s 10-for-1 split took effect, at $121.79 per share. This represented an investment of $121,790. At the October high, shares were worth $239,240. As of Friday, they were worth $186,640. They also hold $600,000 in other retirement savings and collect $2,500 a month from Social Security. Nvidia therefore now represents 23.7% of a portfolio of $786,640. The question this weekend is whether Thursday was a sell-off warning.
What happened to chip stocks this week
The sell-off hit almost every chip name at the same time. The iShares Semiconductor ETF fell 12.15%, its worst day since March 2020, and the VanEck Semiconductor ETF fell 11.21%. Micron fell 17.46% and Lam Research fell 16.36%. Nvidia’s 9.26% drop is one of the smallest.
This gap is significant. The stocks that fell the most sell hardware and memory, which depends on what chipmakers and data center owners plan to spend next year. Nvidia sells to the demand that exists today. Investors were more anticipating a slowdown in future spending than a drop in current orders.
Friday brought some relief. Chip stocks rebounded across the board and Nvidia traded as high as $194.90 during the day before settling at $186.64.
What the actions of retirees have done
Measured from the time of purchase, the investment is still well ahead. The 1,000 shares cost $121,790 and are worth $186,640, a gain of $64,850, or 53.2%, in less than two and a half years.
Measured from the peak, shares returned $52,600 in one month. Thursday alone brought in $18,530, and Friday returned $5,040.
Nvidia is also paying more than before. It increased its quarterly dividend by 1 cent to 25 cents per share this year. On 1,000 stocks, that’s $1,000 per year, or a return of 0.54% as of Friday. The dividend is small relative to price fluctuations, but it’s a sign that the company is generating more cash than it needs.
The arguments in favor of detention
The company continues to grow at a rate few large companies have ever matched. Nvidia’s revenue over the past four quarters reached $302.97 billion, and the latest quarter’s revenue increased by 105.9% year-on-year.
The stock is also cheaper than it seems after a run like this. At $186.64, Nvidia trades at about 23.6 times last year’s earnings. Of the 62 analysts followed, 59 rate it a buy or strong buy, and their average price target is $327.14, about 75% above Friday’s closing price.
The next real test is near. Nvidia will release its quarterly results later this month, and that report will indicate whether customers are still ordering at the rate they were.
The arguments in favor of trimming
The risk for this retiree is concentration. Nvidia represents 23.7% of everything they own, and at the October peak it was 28.5%. A stock that can fall 9% in one day can fall 30% in a few months. A 30 percent drop from there would cost about $55,992, or nearly two years of the $30,000 a year Social Security pays them.
Well-known skeptics still bet against the sector. Michael Burry revealed this week that he took profits on a quarter of his stake against the VanEck Semiconductor ETF after Thursday’s drop, and said the rest of the position remained very large.
A middle way
Selling part of the position is a reasonable option. If the retiree sells 300 of the 1,000 shares at Friday’s price:
- Recipes : $55,992
- Taxable gain: $19,455, since each share costs $121.79
- Federal tax at the rate of 15% in the long term: approximately $2,918
- What remains: 700 stocks worth $130,648, or 16.6% of the portfolio
If the shares are in a traditional IRA, the sale itself creates no tax bill today.
Trimming preserves most of the upside if the analysts are right and the next report is strong. It also transfers part of a paper gain into cash before the report is released, when the stock is likely to fluctuate again.
Where it’s weak
No one knows whether Thursday was the start of a long slide or a big scare of a day. Analysts’ targets were mostly set before this week. And the $2,918 tax figure assumes the retiree’s income keeps them in the 15% long-term capital gains bracket; a larger sale could increase part of the gain.
The essentials
A 64-year-old who turned $121,790 into $186,640 with Nvidia is still well ahead, even after losing $18,530 on the chip industry’s worst day since 2020. The bigger question is whether 23.7% of a retirement should be in a stock ahead of its next earnings report. Selling 300 shares would reduce that figure to 16.6% for about $2,918 in taxes and keep 700 shares in play.
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