On the surface, Nvidia Corp.’s $900 billion selloff since its June record would suggest the artificial intelligence spending boom that propelled it there is cooling. But the undercurrents tell a far less dire story.
Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc. — together accounting for more than 40% of Nvidia’s revenue — have all said they will keep investing billions into AI infrastructure. Meanwhile, Super Micro Computer Inc. — which makes data center servers used in AI — told investors it expects to generate up to $30 billion in sales over the next year, blowing away analyst expectations. And yet, Nvidia — the prime beneficiary of AI spending — has seen its shares tumble 25% in less than two months.
“Nobody reduced numbers and said things are not working with AI or we’re taking a pause on AI,” said Rhys Williams, chief strategist at Wayve Capital Management LLC. “It’s just that people are very nervous.”
Investors had already been rotating out of expensive technology stocks for weeks, instead snapping up everything from small-capitalization stocks to value plays, utilities and real estate companies. Last week’s weaker-than-anticipated jobs report further fueled fears that the US economy may be slowing faster than anticipated. A report Thursday showing a drop in jobless claims helped assuage some of those concerns, prompting equity markets to trim recent losses.
Uncertainty about the macroeconomic backdrop may be adding extra jitters and weighing more heavily on Nvidia and its peers than quarterly earnings, Williams said. The move lower was exacerbated by the unwinding of global carry trades, something many across Wall Street have pointed to as the trigger for the recent surge in market volatility.
At the same time, Big Tech companies largely failed to convince investors during the earnings season that their spending on AI is translating to more sales and bigger profits. “We haven’t yet seen a way to monetize AI, so the return on that spending is unclear. The question is, how long can this continue?” said Srini Pajjuri, managing director and senior research analyst at Raymond James.
A lack of catalysts ahead of Nvidia’s earnings report at the end of August means that the narrative for AI chipmakers isn’t likely to change in the coming weeks, according to Pajjuri. “That will make it challenging for these stocks to work right now,” he said.
Nvidia has also faced other recent challenges. The company hit engineering snags in the development of two new advanced chips, Bloomberg reported this week, while some investors are also concerned about the potential for more competition. Many of Nvidia’s biggest clients, including Alphabet and Microsoft, are developing their own chips to use in AI computing. While it may take years for those products to be ready, they could take market share.
Nvidia isn’t the only AI-related name that’s been pummeled in the widespread drawdown. The Philadelphia Semiconductor Index has fallen more than 20% from a July peak. And despite Super Micro Computer’s strong outlook, its shares slumped 20% on Wednesday after investors were disappointed by its gross margin number.
To be sure, Nvidia shares have doubled in value this year, even after the recent slump. There are still signs of solid demand for AI chips in the near-term, and Wall Street is largely bullish on the technology. Shares of Advanced Micro Devices Inc. spiked when it reported earnings in late July that included an upbeat revenue forecast citing increased demand for AI accelerators.
And it was perhaps just a matter of time before some of Nvidia’s shine had to come off. The shares were trading at about 44 times forward earnings in mid-June, a significant premium to the Nasdaq 100 at about 26 times on the same day. After the recent selloff, the chipmaker is trading at about 30 times — potentially making them more attractive to long-term investors again.
“Nothing has changed fundamentally with these companies other than they probably got a little bit ahead of themselves,” said Ken Mahoney, president and CEO of Mahoney Asset Management.
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