It was quite a morning for Cisco Systems, recording impressive sales and profits, along with a significant $4 billion in AI orders. Yet, despite these achievements, the company’s stock price dropped by 9%.
This mixed performance led to an uneven session on Wall Street. The Nasdaq Composite saw a 0.53% increase around noon, while the S&P 500 was up by 0.41%. In contrast, the Dow Jones Industrial Average dipped by 0.17%. Interestingly, just a couple of hours earlier, all three indices had fared better, with Nasdaq briefly climbing by 1%.
Remember Nvidia back in 2009? A similar signal that pointed to potential growth is now lighting up for a lesser-known chipmaker. In fact, a company that is 100 times smaller than Nvidia is showing what some experts call a “full conviction” signal.
What is causing the difference between the Dow and the Nasdaq?
Let’s take a closer look at Cisco. The networking giant posted record fourth-quarter earnings of $17.3 billion—a rise of 18% compared to last year—and adjusted earnings per share of $1.22. However, despite these numbers, the company’s stock fell by 9.3%. This decline can be attributed to rising memory costs and a less-than-favorable hardware sales mix, which adversely affected Cisco’s gross margins. Because of this, Cisco took a hit of around 68 points on the Dow and about $41 billion in market cap.
You might have heard about “expensive memory chips.” Companies producing those chips are indeed benefiting from Cisco’s situation. For instance, SK Hynix’s stock rose by 7.8%, contributing significantly to the Nasdaq Composite Index—making it one of the primary drivers. This uptick coincides with substantial investments by the South Korean government in local chip manufacturing, boosting stocks in Hynix and Samsung as well.
Micron Technology saw a 5.1% increase, while Sandisk’s stock soared by 13.5% following an optimistic investor presentation, recovering somewhat from a previous downturn.
It seems that memory makers will be able to command higher prices moving forward, and the end consumers will inevitably bear the brunt of these increased costs. Cisco was merely the first major player to disclose the impact of this pricing on its earnings report.
There’s also a notable development with Goldman Sachs, which managed to claw back about 68 points, nearly canceling out Cisco’s losses. The financial institution announced a modest acquisition in the options income space, and investors appear to be adjusting positively to this news.
Interestingly, Space Exploration Technologies saw a 3.4% decline, contributing negatively to Nasdaq, following Wednesday’s profitable results. On a broader scale, producer prices for July held steady, while core PPI increased slightly by 0.2%.
The real cost of chip shortages
Cisco’s report reveals something more significant than just the day’s macroeconomic data. A company can register record sales and profits, alongside substantial AI orders, yet still see a stock drop of 9%. This paradox isn’t because the price was high beforehand; instead, it’s the surging costs of components outpacing income.
While chip shortages often signal good news for manufacturers, the narrative can be misleading. As a long-term Micron shareholder, I do recognize the wealth-building potential in the AI chip shortage, but buyers’ concerns about component costs aren’t a priority for Wall Street until margins start to contract.
It’s likely we’ll hear more about these discrepancies, and understanding which companies are on which side of this trade could be more beneficial than fixating on daily Dow performance.
Should you buy Nasdaq Composite Index stocks right now?
If you’re considering investing in the Nasdaq Composite Index, here are a few things to ponder:
According to analysts, some stocks are being touted as the best options for investment, and interestingly, the Nasdaq Composite Index isn’t on the list. These recommended stocks are seen as aimed for long-term growth and expected to yield significant returns in the years to come.
For instance, looking back at Netflix, if you had invested $1,000 when it was first recommended, you would now have about $400,209! Similarly, investing in Nvidia back then would have turned that same amount into roughly $1,375,393.
People tend to listen to these recommendations, especially considering their strong performance history that outpaces the S&P 500 significantly. It’s an opportunity that shouldn’t be overlooked; staying in the know can be quite advantageous.
For those interested, there’s a new list of top stocks worth checking out.
