Nvidia Shares Rebound Amid AI Optimism

By Deborah Mary Sophia

(Reuters) – Nvidia (NASDAQ:NVDA) shares recovered from earlier losses to trade higher on Wednesday, supporting chip firms after a significant sell-off in the previous session. This movement indicates that AI optimism on Wall Street remains intact despite concerns about the high valuations of these stocks.

Nvidia saw a 1% increase after starting in the red and dipping by about 3% in premarket trading, following a substantial 9.5% drop on Tuesday, which wiped out $279 billion from its market value—the largest single-day decline for a U.S. company.

The combined market valuations of seven major beneficiaries of the AI boom, including Nvidia, Advanced Micro Devices (NASDAQ:AMD), and Broadcom (NASDAQ:AVGO), fell to $3.99 trillion from $5.06 trillion in mid-June.

The enthusiasm for the growth of artificial intelligence technologies has driven many equity market gains this year, raising chip companies’ valuations to levels some investors consider excessive.

Concerns about the slow return on substantial AI investments have increased. Nvidia’s forecast released last Wednesday did not meet high expectations, even though the company reported strong quarterly revenue growth.

Tai Hui, Asia chief market strategist at J.P. Morgan Asset Management in Hong Kong, noted that “the focus is now shifting to valuations in the U.S. equity market in general, and some of the tech names have pretty large premium built in.”

Since its peak on June 18, Nvidia’s shares have dropped approximately 20% in value, with a forward price-to-earnings ratio just below 30, indicating a decline in its valuation. However, the stock is still up more than 650% since the start of 2023.

“The whole AI development is very promising. It’s just the question of how companies are going to monetize all this development and justify the current capital expenditures. Investors are waiting for that answer.”

Other chip stocks, including Micron Technology (NASDAQ:MU), Broadcom, and Qualcomm (NASDAQ:QCOM), rose between 1% and 2.3% on Wednesday. U.S.-listed shares of TSMC, Nvidia’s chip manufacturing partner, also increased by 1.3%.

AMD surged nearly 4% after announcing the appointment of former Nvidia executive Keith Strier as senior vice president of global AI markets. In contrast, Intel (NASDAQ:INTC) slipped 1%, facing setbacks in its contract manufacturing business after tests with Broadcom failed.

Nvidia shares are also under pressure following a Bloomberg News report that the U.S. Department of Justice issued a subpoena to the company, intensifying its investigation into Nvidia’s antitrust practices.

Analysts have warned of increasing regulatory scrutiny on Nvidia. The company recently disclosed receiving requests for information from regulators in the U.S. and South Korea.

Dan Coatsworth, an investment analyst at AJ Bell, stated, “Nvidia is not only the biggest player in the AI chips market, but it is also invested in a large number of other AI companies, which means it has interests in various areas. Regulators might want to know if it is giving preferential treatment to its investee companies or to customers who exclusively use its chips.”