Chip stocks are getting massacred in October — including AMD — on rising rates, downturn fears

  • Rising rates tend to hurt high-flying growth stocks like AMD and Nvidia as investors adjust their financial valuation models on higher Treasury bond yields.
  • Warren Buffett has explained the importance of interest rates for valuing investments.
  • "Any investment is worth all the cash you're going to get out between now and judgment day discounted back," he said.
A worker holding a wafer at Advanced Micro Devices
Norbert Millauer | AFP | Getty Images
A worker holding a wafer at Advanced Micro Devices

Chip stocks are plunging this month as investors react to surging interest rates and concerns over weakening business trends in the semiconductor industry.

The iShares PHLX Semiconductor ETF has declined nearly 5 percent this month through Tuesday versus a 1 percent fall for the S&P 500. The chip sector ETF closed down another 4.4 percent Wednesday.

Several chip stocks are down much more than the sector. Shares of AMD are down about 17 percent month to date, while Nvidia's stock is down nearly 10 percent.

Earlier this week, Raymond James reduced its 2019 earnings estimates for eight chip stocks, predicting companies will announce weakness in business activity. After spending a week in Asia talking to chip supply chain companies, the firm also downgraded several semiconductor stocks in late September, saying the sector has entered a "cyclical downturn."

Interest rates are surging with the benchmark U.S. 10-year Treasury note yield hitting levels not seen in years. The 10-year note yield traded around 3.23 percent a day after hitting its highest level since 2011.

Rising rates tend to hurt high-flying growth stocks like AMD and Nvidia as investors adjust to the new environment. Both these names are still among the best performers this year with AMD up around 150 percent year to date and Nvidia up more than 30 percent.

The spike in rates make higher equity valuation multiples less attractive because investors use U.S. government bond yields as their "risk-free" discount rate in financial models to value stock investments.

Warren Buffett explained last year the importance of interest rates for valuing investments.

"The most important item over time in valuation is obviously interest rates," Buffett said last year. "Any investment is worth all the cash you're going to get out between now and judgment day discounted back. The discounting back is affected by whether you choose interests rates like those of Japan or interest rates like those we had in 1982. ... When we had 15 percent short-term rates in 1982, it was silly to pay 20 times earnings for stocks."