Friday, November 22, 2024

How Nvidia doubled earnings, lost almost $300 billion in value and shook the stock market

Must read

It’s been described as the most important company in the world at the moment.

But new concerns surrounding Nvidia, the chipmaker powering the artificial intelligence revolution — and which this summer became America’s second-largest public company, behind Apple, when its valuation surpassed $3 trillion — have prompted a fresh global market sell-off.  

On Tuesday, Nvidia shares dropped 9.5%, erasing $278.9 billion from the company’s value — the biggest such single-day loss ever for a U.S. stock.

A host of factors appear to have helped drive the sell-off, which also sparked losses in broader market indexes like the Nasdaq Composite and Dow Jones Industrial Average.

Nvidia’s stock has become a bellwether for the global economy as a whole, as it has helped drive a boom in investment from large tech companies that have looked to AI to drive new innovation — and profit.

On Wednesday, its share price declined another 1.7%. Its overall market capitalization — the value of the company based on its shares — remains around $2.6 trillion.

“The surge in NVIDIA’s earnings comes from the massive investment in AI being done by the other big tech companies,” Dario Perkins, managing director at TS Lombard financial group, wrote in a commentary this week

“This creates a circular dynamic that leaves NVIDIA (and now the US stock market in general) dependent on continued big AI investments.” If the five-largest publicly traded companies, like Amazon and Microsoft, stop investing in Nvidia, Perkins said, “we could have a problem.”

Nvidia was once known for making graphics cards for computer games. But in a somewhat fortuitous twist, these cards happen to be perfect for handling the computing load AI requires to perform its tasks. 

As a result, Microsoft and Facebook-parent Meta both now spend more than 40% of their budgets for hardware on Nvidia gear.

Nvidia is now so closely followed that a group of market watchers held a meetup at a bar last month to watch the company report its quarterly earnings — though some later viewed the event itself as a sell signal.

“Nvidia has changed the tech and global landscape as its [graphics processing units] have become the new oil and gold in the IT landscape, with its chips powering the AI revolution and being the only game in town for now,” Wedbush Securities analyst Dan Ives wrote in a recent note.

But growing fears of a broader economic slowdown, as well as renewed skepticism about the timetable for a payoff from AI — basically, how soon all the current investment flowing into it will ultimately lead to well-defined use cases and greater profitability have helped drag Nvidia’s stock price down. 

“I don’t think AI will measure up to the internet in my opinion,” Daron Acemoglu, an economist with the Massachusetts Institute of Technology, said in an interview with the Financial Times this week, calling the technology “a few-trick pony.”

“AI has some great capabilities, but it does not have the same breadth of impacting pretty much everything we do and creating lots of new things yet,” Acemoglu said. “It might, but when it does, perhaps we’ll call that a new technology, perhaps that will be another 10 years, and so on.”

The skepticism has coincided with fresh economic warning signals. In the U.S., the labor market has begun to show unmistakable signs of weakness following the jobs boom that accompanied a broader economic recovery from the Covid pandemic. In China, problems in the housing sector have begun to weigh on consumption. Oil prices, which tend to track global economic activity, have fallen to their lowest levels in three years.

Meanwhile, a pair of new reports this week cast fresh doubt about when AI investments will pay off.   

“Investors are debating whether future revenues for top tech and cloud computing firms could justify billions of dollars of capital spending being poured into artificial intelligence (AI),” analysts with BlackRock Investment Institute wrote

A similar note of caution was sounded in commentary from JP Morgan Asset management, which said that companies would have to start to meaningfully shift emphasis from “training” to “production” for “adequate returns on AI infrastructure to materialize.”  

Complicating matters further was a report Tuesday from Bloomberg News that the Justice Department had begun looking into antitrust issues surrounding Nvidia, which is estimated to maintain at least 90% market share in AI chips for the next two years.

Another factor: Intel, once the dominant force in U.S. computer chips, has seen its share price decline 54% this year and, according to a Reuters report, is now in danger of being delisted from the Dow Jones Industrial Average. While investors have punished Intel for failing to adequately take advantage of the AI boom, it is likely that broader concerns about its payoff added to its losses.   

Steve Sosnick, chief strategist at Interactive Brokers financial group, told NBC News in an email that, even as it has powered higher, Nvidia remains one of the most volatile stocks on the market, meaning its price is subject to large changes, both higher and lower.

“So investors who believe in the company had better get used to the swings,” Sosnick wrote. “Investors love volatility on the way up (aka ‘socially acceptable volatility’) but hate it on the way down. Unfortunately, one usually brings the other.”

Tuesday’s sell-off is far from a death-blow for Nvidia’s stock price, which has more than doubled in 2024, to about $109. The tech-heavy Nasdaq index, too, remains 16% higher on the year, and since 2023 has climbed by nearly two-thirds.

Sosnick says much of the selling of Nvidia’s stock, which trades as NVDA, may ultimately have to do with investment managers making sure they cement the outsized price increase the company’s shares have already seen this year.

“I believe that while individual investors remain understandably enamored with NVDA — heck, many of them made a lot of money — I believe that institutional investors are taking a more sober view, focusing on locking in gains in the back half of the year, and that is pressuring the stock,” Sosnick said. “They understand that no one ever went broke taking a profit.”

Latest article