Nvidia Shares Drop as Chip Demand Concerns Worry Investors

Nvidia (NASDAQ: NVDA) saw its stock price decline nearly 4.5% on Tuesday, with peer AMD (NASDAQ: AMD) experiencing a similar slide of about 5%. This downturn followed disappointing earnings guidance from ASML, a key supplier of chip manufacturing equipment, which pointed to weaker sales expectations for 2025 and heightened fears surrounding global chip demand. ASML’s photolithography machines, especially the Extreme Ultraviolet Lithography technology, are crucial for producing advanced semiconductor chips, including the GPUs Nvidia offers. The company projected net sales for 2025 to be between €30 billion to €35 billion, placing it at the lower end of prior forecasts and alongside below-expected gross margin estimates.

The moderate decrease in ASML’s guidance is largely tied to a slower recovery in chip demand, excluding the AI sector. As the world’s largest semiconductor firm by market cap, Nvidia felt this impact significantly. Furthermore, reports indicate the Biden administration might limit sales of advanced AI processors to certain Persian Gulf nations due to national security issues. These concerns revolve around the possibility of these countries serving as a pathway for China to gain access to prohibited U.S. semiconductor technology. Despite Nvidia being a prominent player in the AI space, the outlook remains uncertain.

The stock’s performance over recent years has been notably volatile. Nvidia achieved impressive returns of 125% in 2021, yet faced a sharp decline of 50% in 2022, followed by a remarkable rebound of 239% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio—a selection of 30 stocks—has outperformed the S&P 500 annually throughout this timeframe. This reflects a trend of lower volatility within the HQ Portfolio compared to Nvidia’s stock, raising questions about future performance given the current unpredictable macroeconomic climate. As interest rate cuts loom and global conflicts persist, could Nvidia replicate the underperformance seen in 2022 over the next year, or will it bounce back strongly?

Nvidia’s recent stock drop may reflect an exaggerated reaction to recent news. The anticipated spending cuts affecting ASML’s performance likely originate from major players like Intel (NASDAQ: INTC) and Samsung, rather than Nvidia’s main manufacturing partner, TSMC. However, at a market price of $132 per share, Nvidia’s stock remains elevated, trading at approximately 46 times anticipated FY’25 earnings and 33 times FY’26 earnings. Potential risks loom on the horizon. As we are witnessing a spike in GPU demand, this momentum may wane, particularly as the training phase for AI models subsides and the utilization of these models transitions towards more efficient options.

The landscape for competition has intensified, with AMD making significant investments to close the gap in the semiconductor market. AMD touts its new Instinct MI300X chip as outperforming Nvidia’s current offerings in various aspects, while Intel is also aiming to compete with affordable AI chip solutions. Additionally, the overall economics of the AI sector remain challenging, characterized by substantial investments in GPU technology yielding minimal financial returns. There are concerns that many companies are driven by a fear of missing out on AI advancements rather than ensuring profitability. This trend could prompt reductions in capital investments that might ultimately affect Nvidia’s growth trajectory. Our valuation estimates place NVDA at $88 per share, 33% below its current levels. To gain more insight into these evaluations, visit our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap?.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.