Nvidia, a leading chip-maker, has seen its shares enter correction territory, falling 12% from their November highs. Several factors have contributed to the sell-off, including new competition from tech giants Amazon and Broadcom, as well as comments from Microsoft CEO Satya Nadella regarding chip supply concerns. Despite these setbacks, Nvidia continues to receive acclaim, securing the 2024 Product of the Year award for its revolutionary AI chip, Blackwell.
Vivek Arya, a respected chip analyst at Bank of America (BofA), remains bullish on Nvidia, praising the company’s leadership in chip design and execution. However, he advises caution during key periods, reflecting on market conditions and company performance. At a recent roundtable hosted at the Nasdaq in Times Square, Arya shared his insights on Nvidia’s current status and future prospects.
He remains optimistic about Nvidia’s role in the AI revolution but acknowledges the challenges posed by emerging competition and market fluctuations. As investors consider the future of Nvidia, it will be important to monitor these competitive dynamics and supply chain issues. Despite the recent dip, Nvidia’s groundbreaking innovations and industry leadership continue to position it as a significant player in the chip-making industry.
Six stocks in the S&P 500 have shown an inverse correlation with Nvidia’s share price moves over the past month, according to an independent analysis. The U.S.-listed stocks are Kraft Heinz, State Street, Walgreens Boots Alliance, MasterCard, healthcare distributor Henry Schein, and automotive parts retailer O’Reilly Automotive. This comes as Nvidia fell into correction territory this week, declining over 10% from its closing high of $148.88 reached last month.
The analysis screened for stocks in the S&P 500 that have moved in the opposite direction to the U.S. chip giant over the past month. A negative correlation value means that as Nvidia’s stock moves, either up or down, the share price of the company listed moves in the opposite direction. A correlation of 0 would indicate no statistical link between Nvidia’s stock and the share price of the company.
It should be noted that correlated returns do not indicate causation or predict future returns or price action patterns. The stocks could have moved higher (as Nvidia fell) for entirely idiosyncratic reasons. The calculations only measure the direction and size of daily price action.
Over a longer period, the total returns of the above inversely correlated stocks diverge. For instance, over the past month, Kraft Heinz shares have also fallen 0.6%, alongside Nvidia’s decline over the same period. Nvidia stock is close to bear market territory after a 17% drop from its record high in November.
The sell-off has intensified since recent comments from Microsoft’s CEO suggested the chip craze is easing. Analysts see Nvidia’s decline as a temporary dip, with strong future AI prospects.
Nvidia shares face new competition
The chipmaker’s stock has declined 17% since its record high of $152.89 on November 21. It is edging closer to a bear market, which Wall Street traders define as a 20% drop from the most recent peak. The AI darling’s stock price decline accelerated late last week following comments from CEO Satya Nadella.
In an interview, Nadella signaled that the AI chip demand frenzy may be waning. When asked if Microsoft was still “supply constrained” in its buildout of AI technologies, Nadella responded, “I am power constrained, yes, I’m not chip supply constrained.”
Since Nadella’s comments, Nvidia shares have declined 7%. Microsoft is thought to be Nvidia’s largest customer, representing an estimated 20% of its revenue.
The comments from Nadella suggest a shifting supply and demand dynamic for Nvidia’s AI chips, which have seen enormous demand over the past two years as companies race to build out their own large language models. The demand was so enormous for Nvidia’s GPUs that the company had to selectively pick which companies would receive priority for its chips. Nadella’s comments that it is no longer supply-constrained for chips don’t necessarily mean that demand is waning for Nvidia’s main product set.
It could simply mean supply is finally catching up for some of Nvidia’s core GPU products. However, Nadella’s comments muddy some of the most bullish views on Wall Street, which loves to hear demand is outstripping supply for a company’s products. One of Nvidia’s largest customers saying that’s no longer the case could give pause to investors hoping for another year of eye-popping growth for Nvidia.
There are other factors that could be weighing down shares of Nvidia in recent weeks, too, including comments from industry leaders in the AI space. CEO Sundar Pichai said that progress in AI models will get more difficult in 2025 because “the low-hanging fruit is gone.”
“When you start out quickly scaling up, you can throw more compute and you can make a lot of progress, but you definitely are going to need deeper breakthroughs as we go to the next stage,” he said. “So you can perceive it as there’s a wall, or there’s some small barriers.”
OpenAI cofounder Ilya Sutskever also suggested that the development of AI could face roadblocks, indicating that we’ve achieved peak data and there will be no more.
There have also been suggestions that the development of artificial general intelligence, seen as a massive milestone for the technology, is farther out than initially estimated. Finally, stellar earnings results from other companies could simply be driving a rotation out of some AI winners and into others, according to Dan Ives of Wedbush. Broadcom, for instance, said in its fourth-quarter earnings release that it expects strength to continue over the next few years.
Broadcom develops custom AI chips for cloud companies like Amazon and Alphabet. “Many on the Street are starting to play 2nd/3rd derivatives of the AI Revolution and sell some Nvidia,” Ives said. However, he stated Nvidia’s ongoing decline should be approached as a buy-the-dip moment for investors.
“This is a digestion period for Nvidia that will be short-lived,” Ives said. “We view Nvidia as a table pounder AI name to own as the Godfather of AI Jensen is leading this 4th Industrial Revolution into 2025.”
