Nvidia’s (NVDA) stock took a nosedive of up to 7% on Thursday, reversing the impressive rally from the previous day. As chip stocks led a tech-induced market decline, concerns about a cooling economy overshadowed Nvidia’s recent gains.
Nvidia Stock Decline: What’s Behind the Drop?
Nvidia’s dramatic drop in stock price follows a significant 13% surge on Wednesday. This rebound was largely driven by strong quarterly results from AMD (AMD), signalling robust investments in AI. However, the broader tech sector’s downturn, influenced by weak economic data, caused a sharp reversal.
Here’s what you need to know:
- Weak Economic Data: New economic indicators sent the 10-year Treasury (^TNX) yield lower, triggering a sell-off across the stock market.
- Tech Sector Impact: Nvidia’s decline mirrored the broader tech sector (XLK) downturn. The tech-heavy index struggled as economic concerns mounted.
Despite the setback, Nvidia remains a pivotal player in the AI chip market. Here’s a breakdown of the current situation:
- Nvidia’s Market Position: Nvidia’s stock is still up approximately 130% year-to-date, highlighting its dominant position in the AI chip sector.
- Peer Comparison: In contrast, rival AMD is down around 9% for the year, illustrating Nvidia’s superior market performance.
Key Factors Affecting Nvidia’s Stock
Several factors are contributing to Nvidia’s recent stock performance:
- Spending Plans: Analysts are scrutinising Nvidia’s future spending plans, which could influence its stock performance.
- Competition: Increased competition in the AI chip market raises concerns about Nvidia’s market share.
- Export Controls: Ongoing export control issues may impact Nvidia’s international business.
- Supply Chain Issues: Potential supply chain disruptions are another factor putting pressure on Nvidia’s stock.
- Valuation Concerns: High stock valuations are a significant worry for investors.
Insights from Experts
Paul Meeks, co-CIO at Harvest Portfolio Management, remains optimistic about Nvidia’s prospects despite the recent drop. According to Meeks, high capital expenditures from hyperscalers (large-scale cloud providers) indicate robust future demand for Nvidia’s chips.
- Microsoft’s Investment: Microsoft (MSFT) is a major Nvidia customer, contributing roughly 19% to Nvidia’s revenue. Microsoft has announced nearly $56 billion in capital expenditures for the year ending June 30 and plans to increase these investments in fiscal year 2025.
- Meta’s Commitment: Meta Platforms (META), another significant Nvidia customer, expects “significant” capital expenditures growth in 2025, further supporting Nvidia’s market position.
The Chip Sector’s Broader Impact
Nvidia’s decline is part of a larger trend affecting the chip sector:
- Sector-wide Decline: Chip peers like Broadcom (AVGO), Micron (MU), Taiwan Semiconductor (TSM), ASML (ASML), and Super Micro (SMCI) also experienced declines on Thursday.
- AI Frenzy: Despite the recent drop, the AI boom has largely benefitted the chip sector, with Nvidia seen as the main beneficiary.
Morgan Stanley’s Perspective
Morgan Stanley analysts, led by Joseph Moore, have placed Nvidia on their ‘Top Pick’ list following the recent pullback from record highs. They cited several drivers for Nvidia’s stock decline but remain confident in its long-term potential.
- Analyst Opinion: Morgan Stanley identified five key concerns impacting Nvidia, including spending plans, competition, export controls, supply chain issues, and valuation worries.
- Future Outlook: Despite these concerns, Morgan Stanley maintains an Overweight rating and a $144 price target on Nvidia, predicting a strong earnings environment for Nvidia and the broader AI sector.
Looking Ahead
Nvidia is set to release its next quarterly report on Wednesday, August 28. Investors will be closely watching the results for insights into Nvidia’s performance and future outlook.
In summary, Nvidia’s stock decline reflects broader market trends and concerns about economic conditions. However, the company’s strong market position and significant investments from major clients like Microsoft and Meta suggest that Nvidia remains a key player in the AI chip sector.
