Nvidia, one of the leading players in the artificial intelligence (AI) chip market, saw its stock price decline on Thursday, dragging down other AI-linked chip companies in the process. The downturn came after Nvidia’s third-quarter forecast fell short of investor expectations, a disappointment that rippled through the tech sector and dampened optimism in a market that has been fueled by the AI boom.

In premarket trading, Nvidia’s shares dropped 4.5%, setting the stage for a potential loss of approximately $150 billion in market value. This decline was prompted by Nvidia’s projection of third-quarter gross margins that could miss market estimates, coupled with a revenue forecast that was largely in line with analysts’ expectations. This muted outlook overshadowed Nvidia’s second-quarter performance, which had otherwise beaten expectations, and the announcement of a $50 billion share buyback.

The ripple effect of Nvidia’s forecast was felt across the semiconductor industry, with shares of other major chip firms, including Broadcom, Advanced Micro Devices (AMD), Arm, and Micron, all experiencing declines ranging from 1.6% to 2%. Nvidia’s chip manufacturing partner, Taiwan Semiconductor Manufacturing Company (TSMC), also saw its U.S.-listed shares fall by 2%. On the Taiwan Stock Exchange, TSMC’s shares closed lower, contributing to a broader decline in Asian tech stocks. Notably, South Korea’s KOSPI index dropped to a two-week low, reflecting the global impact of Nvidia’s forecast miss.

The market reaction to Nvidia’s forecast was less severe than some had anticipated. According to data from options analytics firm ORATS, the options market had priced in an 11% price swing for Nvidia’s shares, but the actual decline was significantly smaller. Still, the disappointment was palpable among investors who had grown accustomed to Nvidia consistently exceeding expectations by substantial margins, driven by surging demand for its AI chips.

Nvidia’s stellar performance over the past year, marked by consistent earnings beats and explosive revenue growth, had set a high bar for future results. This trend of surpassing analyst estimates fueled investor optimism and contributed to Nvidia’s status as one of Wall Street’s best-performing stocks in 2024. However, the company’s latest forecast, which fell short of those elevated expectations, served as a stark reminder of the challenges of sustaining such rapid growth.

JJ Kinahan, CEO of IG North America and president of online broker Tastytrade, noted the difficulty Nvidia faced in meeting investor expectations. “They beat, but this was just one of those situations where expectations were so high. I don’t know that they could have had a good enough number for people to be happy,” Kinahan said, highlighting the heightened scrutiny on Nvidia and other tech companies linked to the AI sector.

Nvidia’s softer-than-expected forecast has broader implications for market sentiment as the industry heads into what is historically a volatile period. September, in particular, has been the worst-performing month for the S&P 500 since World War II, with an average decline of 0.8%, according to CFRA data. The tepid response to Nvidia’s earnings report could set the tone for investor behavior in the coming weeks, especially as traders brace for potential market turbulence.

Adding to the uncertainty is the upcoming U.S. employment report, which investors are closely watching for signs of labor market weakness. Earlier in August, concerns about a cooling labor market contributed to a decline in stock prices, and next week’s report could either alleviate or exacerbate those worries.

Despite the recent dip, Nvidia’s stock remains a standout performer, up about 150% so far in 2024, making it the biggest winner in Wall Street’s AI rally. However, the company’s valuation, which stood at 36 times earnings ahead of its quarterly report, remains a topic of debate among investors. While this valuation is below Nvidia’s five-year average of 41 times earnings, it is still relatively high compared to the S&P 500, which trades at 21 times expected earnings, above its five-year average of 18.

The broader tech sector, including companies like Microsoft and Alphabet, has also seen investor confidence waver in recent weeks. Both companies reported earnings that fell short of justifying their high valuations, leading to declines in their stock prices. Concerns about increasing spending on AI technology among these tech giants have further fueled uncertainty in the market.

Nvidia’s forecast for its fiscal third-quarter revenue of $32.5 billion, plus or minus 2%, implies an impressive 80% growth from the same quarter a year ago. However, the company’s expected adjusted gross margin of 75%, plus or minus 50 basis points, was slightly below the average analyst forecast of 75.5%. While these figures still represent robust growth, they were not enough to satisfy investors who had been hoping for more significant outperformance.

As Nvidia and other AI-linked companies navigate the challenges of maintaining momentum in a rapidly evolving market, the recent sell-off serves as a reminder of the risks associated with high expectations. The coming weeks will be crucial in determining whether Nvidia and its peers can regain investor confidence or if the recent downturn marks the beginning of a more extended period of volatility in the tech sector.

(Adapted from ThePrint.in)