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NVIDIA's 20% Drop Explained: AI Chip Crisis?

NVIDIA's stock has more than doubled in value and added $1.3 trillion to its market capitalisation this year, so even with the recent decline, investors have still received significant gains from the stock.

Preeti Anand

10 Sep 2024 12:30 IST

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The market capitalisation of NVIDIA, the top manufacturer of artificial intelligence (AI) chips, has dropped dramatically; it lost over $406 billion this past week. The market value of NVIDIA has fallen significantly in the last two weeks—more than 20%—raising concerns about the possibility of a slowdown in the growth of AI chips. Although the company remains a significant player in the AI hardware market, several possible reasons exist for this notable decline. This decline, which accounts for more than 20% of its market capitalization, has had a discernible effect on major equity benchmarks, indicating more considerable apprehensions over the US economy and potential overvaluation in the artificial intelligence space.

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The Reasons behind NVIDIA's recent decrease in market capitalisation

There could be other reasons behind NVIDIA's recent decrease in market capitalisation. Overvaluation worries are a major contributing factor; once NVIDIA's stock price surged to a significant premium, investors began to wonder if the company's core fundamentals supported its valuation. The current decline might, therefore, be a result of a market correction to realign the value. Due to growing market saturation and rivalry in the AI chip industry, NVIDIA has also faced difficulties. The active development of AI accelerators by firms like AMD and Intel may challenge NVIDIA's market dominance and future expansion. A broader sell-off in technology equities, such as NVIDIA, has resulted from economic uncertainty, which includes global concerns like interest rate hikes and recession fears.

Factors Contributing to NVIDIA's Decline

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This precipitous drop draws attention to a developing concern for investors: NVIDIA's market volatility has increased to surpass that of other top tech firms and even makes Bitcoin seem stable, in contrast. NVIDIA's stock has ranged between $90.69 and $131.26 during the previous 30 trading days, with a particularly sharp decline on Tuesday. Its 30-day realised volatility has increased to about 80 due to this volatility, which is roughly four times higher than Microsoft's, double that of Bitcoin, and higher than the volatility observed in well-known meme stocks like those connected to Elon Musk's Tesla Inc. and Donald Trump's media company.

According to Bloomberg, the recent decline is NVIDIA's worst two-week performance in the previous two years. A dismal projection, problems with the business's Blackwell chip, and the US Justice Department's recent intensification of its antitrust probe are all contributing factors. Furthermore, when Broadcom Inc. released a dismal sales prediction, the semiconductor industry suffered further blows.

Investors have still received significant gains from NVIDIA's stock: What Does the Future Hold for AI Chips?

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NVIDIA's stock has more than doubled in value and added $1.3 trillion to its market capitalisation this year, so even with the recent decline, investors have still received significant gains from the stock. Wall Street analysts maintain an optimistic forecast for NVIDIA, predicting that the company will continue to reap the rewards of the continuous development of AI infrastructure. It is anticipated that this growth will continue for a few more quarters. The company's biggest customers, which generate more than 40% of its sales and include Microsoft, Meta Platforms, Alphabet, and Amazon, have stuck to their budgets. This optimistic outlook was supported by NVIDIA's most recent financial results, which showed revenue that more than doubled and exceeded projections. Even though adjusted earnings and sales projections exceeded analyst expectations, they did not meet the upper end of estimates, disappointing some investors. The discrepancy between investor expectations and actual outcomes has sparked questions about how long AI spending will last. However, the changing AI landscape indicates that there will likely be more volatility ahead for NVIDIA and other chipmakers. This volatility may offer long-term investors the chance to purchase AI-related stocks at a reduced entry price.

The Long-Term Outlook for AI Chips

Despite recent market volatility, Wayve Capital Management's chief strategist, Rhys Williams, has an optimistic stance on the AI industry. Williams claims that long-term investors may have a rare opportunity to purchase AI-related stocks at attractive valuations because of the current market turbulence. Williams says that for individuals who are prepared to have a long-term outlook, including AI stocks in their investment portfolio could be rewarding. He thinks there is much room for expansion in the AI sector, which is still in its infancy. While the stock prices of NVIDIA and other chipmakers are likely to remain volatile as the AI industry develops, Williams stresses the significance of keeping an eye on the long-term outlook for the sector.

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