Why growth stocks Nvidia, AMD and Unity fell today
Many growth stocks fell on Thursday as investors turned away from high-priced companies. At market close, the shares of Nvidia (NASDAQ: NVDA), Advanced micro-systems (NASDAQ: AMD), and Unity Software (NYSE: U) fell by 4%, 5% and 9% respectively.
Positive news regarding the effectiveness of the booster injections against the omicron variant has allowed investors to refocus on the emerging economic recovery. A report released Thursday showed weekly jobless claims fell to their lowest level in 52 years. But while a strong job market is great for workers looking for work, some growth investors have taken the news as cause for concern.
A tight labor market could lead to higher wages, which in turn could fuel inflation. Growth stocks are valued primarily on the basis of their expected future earnings, discounted to date. When fears of higher inflation intensify, investors increase the discount rate they use to value assets. Essentially, this means that a company’s expected profits are worth less today and by extension, so are its stocks.
Nvidia, AMD and Unity are three of the fastest growing companies on the planet. So naturally, a lot of the value of their stocks is tied to their future profits. They are therefore particularly exposed to variations in discount rates, and therefore to inflation. Therefore, investors can expect their stock prices to be negatively affected by any news that seems to make inflation more likely.
That said, while short-term price / earnings multiples and other valuation ratios can fluctuate due to inflation concerns, a company’s true value is ultimately determined by its earnings and cash flow. long-term. As major semiconductor manufacturers, Nvidia and AMD are poised to excel in this regard. And Unity, as a growing 3D development platform, is also well positioned to deliver impressive profit growth over the next decade.
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Joe Tenebruso has no position in the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices, Nvidia and Unity Software Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.