Nvidia stock sell off – how long will it last?

Analysis by Kathleen Brooks

What’s going on with Nvidia? One minute it’s the world’s most valuable company and the next minute it is down 7% in 5 days and is lagging the broader US blue chip stock indices. It is currently down more than 2% on Monday, and it is the fourth worst performing stock on the S&P 500, and the third worst performer on the Nasdaq 100, with other chip makers also experiencing a sell-off at the start of the last week of Q2.

Interestingly, the sell off in Nvidia has not been followed by declines in other Magnificent 7 stocks today. Apple and Microsoft, the other tech megaliths, are higher so far on Monday, and Tesla is the best performer in the Nasdaq 100 index on Monday and is up nearly 3% at the start of this week.

So why is Nvidia selling off as we move towards the middle of the year, and does it bode ill for 2H? We think there are a few reasons for its sell off, as we will detail below.

1.SPDR tech fund rebalancing: This happened at the end of last week. The recent volatility in Nvidia’s share price, which saw it become the most valuable company in the world before pulling back, meant that there was a decent amount of rebalancing going on for one of the world’s biggest ETFs, which may have added to the volatility in Nvidia’s share price. This will have a short term impact on Nvidia’s share price.

2.Volatility: as you can see in the chart below, Nvidia is an extremely volatile stock. The chart below shows Nvidia 1-month call option volatility and the Vix (green line). The calm Vix index hides the fact that the second-best performer on the index is extremely volatile. As we have said before, Nvidia does experience periods of extreme volatility, both to the upside and to the downside. If you own this stock, you need to make peace with that. The numbers for the latest sell-off in Nvidia is astounding it has lost nearly $300bn in value and its market capitalization briefly fell below $3trillion. Currently its market cap is below Microsoft’s and Apple’s. This is a long term factor to consider when trading Nvidia.

Chart 1

Source: XTB and Bloomberg

3. Are retail traders ditching Nvidia? After such a strong run in the first half of this year, its stock price is higher by 150% since January, it is no wonder that retail traders and speculators are taking profits as we move into the slower peak summer months. We can see some of the speculative support for Nvidia and other tech stocks fall away. By looking at the non-commercial CFTC Nasdaq 100 futures positioning report, we can see that speculators have cut their positions in recent weeks, and we expect that this continued last week, we will get last week’s data on Tuesday. This does not mean that tech is in a bubble, rather that traders are looking for value elsewhere. This could have a medium term impact on Nvidia’s share price.

4. Rotation: At the start of the week, the Dow Jones jumped by 300 points. We expect value stocks in the US to be the main beneficiary of the AI tech stock sell off, as investors shun some European stocks in the lead up to key elections in France and the UK. The Dow is approx. 500 points away from its record high daily close at 40,000, reached on 17th May. This is the new target level. If the tech stock sell off is protracted, then we could see traders pile into value stocks, however, it is too early to say if this will be a theme to watch in H2. If we see declining inflation pressure in this week’s core PCE deflator, and a greater expectation of a September rate cut from the Fed, then AI tech stocks could stage a rebound.

5. Is Nvidia too expensive? Not even the stock split earlier this month has dampened down Nvidia’s stock price volatility. Analysts have upgraded their forecasts for their Q2 earnings in the last 4 weeks, however, with a 12-month forward P/E ratio of 42, higher than the average for the S&P 500 of 25.6, there is no denying that Nvidia is starting to look a bit rich.

While we don’t deny that Nvidia is delivering on the earnings front: it is expected to deliver $28bn of revenue in Q3, and operating profits of $18.5bn, investors must pay up for these earnings. Thus, there is less room for Nvidia to slip up when it delivers its earnings reports, which may worry some investors. Tech is a multiyear theme, especially Artificial Intelligence, thus we do not expect Nvidia’s stock price to fall off a cliff, but a pullback is to be expected. Added to this, it is normal for investors to pause and consider if a stock is looking overvalued, even a stock like Nvidia.