What Happened:
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) fell 6.5% in the afternoon session after the stock continued to pull back, suggesting investors are likely taking profits following a spectacular year-to-date run. Nvidia attained a rare feat earlier in the month (June 2024): It became the most valuable stock in the world, with a market cap of more than $3 Trillion and a year-to-date return in excess of 150% in June 2024.
The recent declines suggested that some may be beginning to think that too much optimism is priced into the stock. We'd note that the company hasn't shown any blemishes lately, with Q1'2024 earnings coming in quite strong and above expectations.
The quarter specifically blew past Wall Street's sales and profitability expectations, mostly due to better-than-expected results in its data center and automotive segments. Despite growing macro headwinds amid a cyclical downturn, which has dampened the performance of other semiconductor companies, Nvidia provided forward revenue guidance ahead of Consensus, demonstrating that demand for its products—especially its much-coveted AI solutions—remains strong.
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What is the market telling us:
Nvidia's shares are very volatile and over the last year have had 11 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 27 days ago, when the stock gained 7.5% on continued strong momentum following a strong earnings report in the previous week. This helped drive the Nasdaq to a record high. The tech-heavy index crossed the 17,000 mark.
There was also some positive news over the weekend. The Information reported that Elon Musk's AI company, xAI, announced plans to buy Nvidia's AI chips for its new supercomputer. On Monday, May 27, 2024, xAI announced its series B funding round on the social media platform X.com (formerly called Twitter). The AI start-up raised $ 6 billion to "take xAI's first products to market" and to "build advanced Infrastructure."
According to the reports, it is likely that the development of the infrastructure will birth a massive computing system - dubbed "the Gigafactory of computing" - which is expected to use 100,000 semiconductors based on NVDA's H100 GPU, and with an estimated size exceeding 4x the biggest cluster in existence.
Overall, the report suggested that it is still early days in the hot AI market while providing more definitive insight into the growing demand for Nvidia's AI chips.
Nvidia is up 148% since the beginning of the year, but at $119.60 per share it is still trading 11.8% below its 52-week high of $135.58 from June 2024. Investors who bought $1,000 worth of Nvidia's shares 5 years ago would now be looking at an investment worth $31,347.
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