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AI Stock Rally Stalls as Nvidia Drops Back Below $1 Trillion

AI Stock Rally Stalls as Nvidia Drops Back Below $1 Trillion

(Bloomberg) -- The rapid rally in tech stocks benefiting from artificial intelligence has stalled as a disappointing outlook from Inc. sparked a selloff in AI-exposed stocks.

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AI software firm fell more than 18% Thursday, extending Wednesday’s drop of 9% on a disappointing sales outlook, and paring its gain for the year to just under 200%. Nvidia Corp. declined 5.7% Wednesday after surging over 30% in three days, after the chipmaker briefly reached a $1 trillion market cap earlier this week.

“Last night, earnings from C3.AI and Salesforce showed the risk that the recent investor enthusiasm for tech shares poses,” said Ed Yardeni, chief investment strategist at Yardeni Research.

Wall Street has been obsessed with everything AI this year, with Nvidia’s blowout revenue forecast adding fuel to the frenzied rally. But lofty valuations — Cathie Wood says it’s “priced ahead of the curve” — are a reason for caution in the still nascent industry.

“While technology sector stock prices may be due for a short-term breather after their impressive performance this year, we’d continue to expect the sector’s forward earnings to be revised higher over the longer term as widespread AI spending ramps up and as the semiconductor cycle heads up,” Yardeni said.

Read more: Nvidia Touches $1 Trillion Mark After Beating Rivals to AI

Cracks appeared in Asia as well, with three Nvidia suppliers cooling after big gains in May. Taiwan Semiconductor Manufacturing Co. fell for a third straight day, while Tokyo-listed Advantest Corp. and South Korea’s SK Hynix Inc. are little changed over the past two sessions.

According to a Bloomberg Intelligence analysis, generative AI is poised to be a $1.3 trillion market by 2032 as it boosts sales for the tech industry’s hardware, software, services, ads and gaming segments.

Nvidia is expected to be the prime beneficiary of the wave of demand for generative AI like ChatGPT. That’s still left some wondering if the world’s most valuable chipmaker is now too pricey.

Even after its latest dip, the stock is trading at 23 times estimated sales for the current year. That compares with less than 15 times for both Lattice Semiconductor Corp., which has the second-highest valuation on the Philadelphia Semiconductor Index, and, the small cap software maker whose ticker is “AI”.

Read more: Generative AI Market Could Expand 42% to $1.3 Trillion by 2032

“The AI excitement is becoming irrational,” said Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management.

“To see the market caps of AI-related stocks rise by hundreds of billions of dollars in a matter of weeks is worrisome, especially since it remains unclear exactly how these companies will monetize artificial intelligence,” said Landsberg.

The AI faithful are unlikely to be shaken by a few down days, however. Nvidia co-founder and Chief Executive Officer Jensen Huang, whose personal fortune has grown by $20 billion this year according to data compiled by Bloomberg, says companies that refuse to take full advantage of the opportunities provided by AI “will perish.”

Nvidia has 49 buy recommendations, more than all but four stocks on the Nasdaq 100. Its shares have seen a proliferation of bullish bets in the options market, with the highest trading volume Wednesday in July $500 and $550 calls, which bet on 32% and 45% increases, respectively, within the next seven weeks.

“At the current moment, the AI boom is shifting the financial fortunes of one company: Nvidia,” Vital Knowledge’s Adam Crisafulli wrote in a note to clients. “Every company on the planet is talking about how they’re AI plays, but only NVDA is seeing a stairstep shift in its income statement because of the technology.”

--With assistance from Joanna Ossinger and Mark Tannenbaum.

(Updates stock moves thoughout and adds comments.)

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