Why Did Nvidia Stock Fall 5%?

Nvidia (NASDAQ: NVDA) stock fell by close to 4.5% on Tuesday. Peer AMD stock (NASDAQ:AMD) also saw a sharp decline, falling by about 5%. The selloff follows an earnings report by chip manufacturing equipment supplier ASML which indicated weaker-than-expected sales guidance for 2025, raising concerns among investors about global chip demand. ASML produces highly sophisticated photolithography machines, particularly Extreme Ultraviolet Lithography equipment, which is essential for manufacturing cutting-edge semiconductor chips including the GPUs that Nvidia sells. ASML said it expects net sales for 2025 to come in at between Euro 30 billion to 35 billion, which is toward the bottom end of its previous forecast, with gross margin forecasts also coming in below estimates.

Now, although the decline in guidance was attributed to slower chip demand recovery outside of the AI sector, Nvidia, being the world’s biggest semiconductor company by market cap, was impacted considerably. Additionally, there have been reports that the Biden administration may restrict sales of advanced AI processors to some Persian Gulf countries, citing national security concerns. This stems from worries that these countries could act as a conduit for China to acquire U.S. semiconductor technology that is currently banned from direct export to China. While Nvidia has been the poster child of the AI revolution, Here’s A Better AI Pick Than Nvidia stock

The increase in NVDA stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 125% in 2021, -50% in 2022, and 239% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could NVDA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

To be fair, Nvidia’s sharp stock decline on Tuesday may have been an overreaction. Much of the capital expenditure cuts that are likely impacting ASML potentially come from Intel (NASDAQ: INTC) and Samsung foundries, rather than from TSMC, Nvidia’s primary manufacturing partner. However, Nvidia stock still appears pricey. At its current market price of $132 per share, the stock trades at about 46x consensus FY’25 earnings and 33x FY’26 earnings. There are also risks ahead.  See our scenario analysis on Could Nvidia Stock Crash To $40? The big surge in GPU demand that we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs.

Competition is also mounting with other chipmakers such as AMD investing significantly to catch up in this space given the high stakes. AMD claims that its new Instinct MI300X chip outperforms Nvidia’s current chips in several parameters, while Intel is also looking to make a dent in the space with more value-priced AI chips. Separately, the economics of the AI business remain weak, with heavy investments in GPU chips yielding minimal revenue. There are concerns that companies are investing in AI due to the fear of missing out, rather than focusing on returns. This could eventually lead to reduced capital spending and impact Nvidia, We value NVDA stock at $88 per share, about 33% below the current market price. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock.

[1] Returns as of 10/16/2024
[2] Cumulative total returns since the end of 2016

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