Nvidia Corp. has seen a staggering $900 billion wiped off its market value since reaching a record high in June. On the surface, this might suggest that the surge in artificial intelligence (AI) spending, which initially propelled the company to such heights, is waning. However, the broader picture reveals a far more nuanced situation.
Despite the selloff, tech giants like Microsoft Corp., Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc. — which collectively contribute over 40% of Nvidia’s revenue — have affirmed their commitment to pouring billions into AI infrastructure. Simultaneously, Super Micro Computer Inc., a key player in the AI ecosystem through its data center servers, has projected sales of up to $30 billion in the coming year, significantly surpassing analyst expectations. Yet, Nvidia, a major beneficiary of this AI spending boom, has seen its stock price plunge by 25% in just under two months.
“Nobody has reduced their numbers or suggested that AI isn’t working or that they’re pausing AI investments,” said Rhys Williams, chief strategist at Wayve Capital Management LLC. “It’s just that investors are very nervous.”
The market’s recent shift away from high-valued tech stocks towards smaller-cap stocks, value plays, utilities, and real estate, has been evident for weeks. This rotation was exacerbated by a weaker-than-expected jobs report last week, heightening concerns that the U.S. economy may be slowing down more rapidly than anticipated. A subsequent report indicating a drop in jobless claims provided some relief, helping to pare back recent market losses.
According to Williams, macroeconomic uncertainties are contributing to the market’s anxiety, weighing more heavily on Nvidia and similar tech stocks than their quarterly earnings reports. The recent downturn has also been intensified by the unwinding of global carry trades, which many on Wall Street believe triggered the recent surge in market volatility.
Additionally, major tech companies struggled to convince investors during the recent earnings season that their AI spending is translating into higher sales and profits. “We haven’t yet seen a clear way to monetize AI, so the return on that spending remains uncertain. The question is, how long can this continue?” said Srini Pajjuri, managing director and senior research analyst at Raymond James.
Pajjuri also noted that with Nvidia’s next earnings report not due until the end of August, there are few catalysts to change the narrative for AI chipmakers in the coming weeks. “That will make it challenging for these stocks to perform well right now,” he added.
Nvidia is also grappling with additional challenges. The company has encountered engineering difficulties in the development of two new advanced chips, according to a Bloomberg report. Furthermore, there are growing concerns about potential competition, as some of Nvidia’s largest clients, including Alphabet and Microsoft, are developing their own AI chips. While these products may take years to come to market, they could eventually capture a share of Nvidia’s dominance.
Nvidia is not alone in facing the brunt of the broader tech selloff. The Philadelphia Semiconductor Index has dropped more than 20% since its peak in July. Despite Super Micro Computer’s optimistic outlook, its shares plummeted 20% on Wednesday after investors were disappointed by its gross margin figures.
However, it’s worth noting that Nvidia’s shares have still doubled in value this year, even after the recent downturn. Demand for AI chips remains robust in the near term, and Wall Street continues to hold a largely bullish view on the technology. Advanced Micro Devices Inc. (AMD), for instance, saw its shares spike after reporting strong earnings and an optimistic revenue forecast driven by increased demand for AI accelerators.
As Ken Mahoney, president and CEO of Mahoney Asset Management, pointed out, “Nothing has fundamentally changed with these companies other than the fact that they probably got a little bit ahead of themselves.” Nvidia’s valuation, now trading at about 30 times forward earnings after the recent selloff, compared to 44 times in mid-June, might once again be attractive to long-term investors.
Related topics:
What Is Edge Detection Neural Network?