Chip and Dip: Is the Semiconductor Weakness a Leveraged Buying Opportunity?

In a pre-Thanksgiving rout, the broad market is feeling the pain of indigestion as the Dow Jones Industrial Average swallowed up to 500 points of losses, but the declines in the technology sector, specifically leveraged semiconductor exchange-traded funds (ETFs) like the Direxion Daily Semiconductor Bull 3X ETF (NYSEArca: SOXL), could benefit from a dip in chips.

For much of the year, SOXL was riding high on the strength of tech in the historic bull market run for U.S. equities, but it took a brunt of the semiconductor sector’s punishment on Friday–down almost 7%–with its 300% exposure thanks to Nvidia missing on revenue for its third quarter earnings report. The losses continued to roil Nvidia on Monday as shares fell 9.3%, which in turn, caused the decline in SOXL by 8.73%.

This, of course, made way for bearish gains as the Direxion Daily Semiconductor Bear 3X ETF (NYSEArca: SOXS) rose almost 9%.

Nvidia Swings and Misses on Revenue

Last week, Nvidia outperformed analyst expectations in the earnings department, but missed on the revenue front, whiplashing semiconductor ETFs in the process. Nvidia’s earnings per share came in at $1.84 per share, besting analyst expecting $1.71 per share. The culprit for the latest declines was was revenue, which clocked in at $3.18 billion versus an expected $3.24 billion by Wall Street.

Further blame could be assigned to the chipmaker’s fourth quarter guidance–it’s expecting $2.70 billion in revenue for the final quarter while Refinitiv consensus estimates came in at a more exuberant $3.40 billion. The lower guidance came on expectations of surplus inventory for the quarter.

“Our Q4 outlook for gaming reflects very little shipment in the midrange Pascal segment to allow channel inventory to normalize,” said Chief Financial Officer Colette Kress. Revenue for Nvidia’s biggest segment, gaming, fell below the $1.89 billion FactSet consensus estimate, coming in at just $1.76 billion for the quarter.

Tech Comeback Hinges on Semiconductors

Semiconductor ETFs have certainly seen better days or years–ProShares Ultra Semiconductors (NYSEArca: USD)–is down 15.46% year-to-date, VanEck Vectors Semiconductor ETF (NYSEArca: SMH)–down 4.45% YTD and iShares PHLX Semiconductor ETF (NasdaqGM: SOXX)–down 3.08% YTD. However, does this slide constitute a buying opportunity for the bold bargain-hunting trader in SOXL and semiconductors in general?

“One of the biggest tells within the technology sector is what happens in the semiconductor industry,” said tech investor Paul Meeks. “Right now, we’re in the midst of what we call an inventory correction–that means not only are there too many chips at the vendors themselves, but at their customers.”