Nvidia shares lose 16% – technical blip or cause for concern?

Chipmaker giant Nvidia has had a rollercoaster week. Since overtaking Microsoft to become the most valuable company in the world last Tuesday (18 June), it has taken a downturn. 

The stock slipped into the red just two days after securing top spot, losing 16% between Thursday and market close on Monday. That’s equivalent to over $500 billion in market value. It is now back to being the third most valuable company based on market cap, behind Microsoft and Apple.

Despite this, it is too soon for investors to panic. While the stock market darling has taken a tumble in recent days, it is still up almost 4% over the past month and 145% year-to-date. What’s more, technical factors seem to be the driving factor behind Nvidia’s recent stumble. Meanwhile, its earnings outlook still looks strong. 

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

“It was the end of the month, the end of the quarter and the end of H1, and investors preferred taking profits while they repositioned for the new half than buying more Nvidia shares at peak levels,” explains Ipek Ozkardeskaya, senior analyst at Swissquote Bank. 

Indeed, Nvidia’s chief executive Jensen Huang seems to have been taking a similar strategy himself. SEC filings reveal he sold almost $95 million of Nvidia stock in June – although the documents show the transactions have been planned since March. 

With the company’s earnings still looking strong (the latest revenues were up 18% on the previous quarter and 262% year-on-year), the bigger question for investors now is: just how high can Nvidia rise and do its strong results merit its current valuation? 

Is Nvidia overvalued?

There are always risks associated with investing at the top of the market – and some investors have started to question whether Nvidia is in a bit of a bubble. Its valuation multiples do look stretched, something Eric Savitz explored at length in a recent piece for Barron’s. 

That said, its earnings have been strong and are currently forecast to remain so. The company said it expects quarterly earnings to come in at around $28 billion for the second fiscal quarter – more than double the year before.

What’s more, tech stocks often trade at a premium as investors price in future opportunities associated with artificial intelligence. With this in mind, Dan Coatsworth, investment analyst at AJ Bell, argues that Nvidia’s current valuation (38 times forecast earnings) is “a premium rating but not out of the ordinary”. 

That said, he adds that Nvidia will need to keep on delivering good news if it wants to maintain this current rating. “A stock trading on a premium rating needs to exceed expectations every quarter, otherwise it is at risk of a pullback,” he explains. “That applies to every stock, whether they are tech darlings or companies simply selling donuts.”

For now, it is too soon to know whether investors should read much into Nvidia’s recent fall. “Sometimes it doesn’t take much for market sentiment to turn,” Coatsworth adds, and “pre-market indicative prices imply Nvidia’s shares are going to rise when US markets open for trading on Tuesday”. 

Impact of Nvidia selloff on US equity markets

As Nvidia’s share price has risen to dizzying heights, investors have expressed concern about it dominating broader US and global equity markets. The stock makes up almost 7% of the S&P 500 and is responsible for around a third of the index’s overall return so far this year. 

This, combined with fears about the dominance of other Magnificent Seven tech stocks, has prompted some to question whether they should ditch global and US tracker funds in an attempt to manage concentration risk. 

The good news for investors is that Nvidia’s recent stumble hasn’t impacted US equity markets too badly yet. “Although NVIDIA has sneezed, the wider market hasn’t caught a cold with a mixture of less extreme movements in both directions for the rest of the magnificent 7,” says Derren Nathan, head of equity research at Hargreaves Lansdown. 

“Meanwhile, in other sectors US stocks saw gains in energy, financials and utilities: a vote of confidence by investors in the health of the broader economy,” he adds.