It’s been quite the ride for Nvidia (NASDAQ: NVDA) investors over the past few years. If you were lucky enough to buy in 2022 before the stock went on a tear, you could be up nearly 800% — not a bad return. The semiconductor designer almost singlehandedly supplies the artificial intelligence (AI) industry with its enormously powerful “superchips” and is rewarded handsomely for it.
As Nvidia posted earnings that beat already sky-high expectations quarter after quarter, investors quickly jumped on board and many watched as their portfolios swelled. You could be forgiven for thinking that up was the only direction its share price could move, but over the last month, it’s retreated. It’s down more than 18% since July 10.
So what gives? Should investors be worried? In short, probably not. Stocks naturally retreat after big gains. It’s to be expected; in fact, it’s healthy. Yes, 18% is a lot, many stocks move less over the course of a year, but we’ve got to keep perspective here. Remember, Nvidia is up over 115% already this year.
However, we also don’t want to stick our heads in the sand, especially with a stock that is so hot. Hype can be a real danger; a healthy skepticism is always the right attitude to maintain in the market. There are some real factors that may be contributing to the retreat.
Investors are questioning the viability of AI as a whole
Nvidia isn’t alone in seeing its stock dip. The tech-heavy Nasdaq Composite as a whole saw one of its worst days in a long time after Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reported its second-quarter earnings on July 23. Maybe this surprised some investors. After all, Alphabet actually beat earnings per share (EPS) consensus estimates and reported a nearly 14% year-over-year jump in revenue. Strange that the stock would dip then, no? Well, investors were focused on the increase in capital expenditures.
The company is spending a lot of money in its quest to stay ahead of the AI pack — even more than many expected — and it looks like this will continue for some time. There is a concern that the return on this investment won’t be enough to justify the spending.
This is a legitimate concern and my top word of caution for Nvidia investors. Alphabet and the rest of big tech will only pay exorbitant sums of money for Nvidia’s chips if they are making exorbitant sums of money from the AI products they create. No one expects there to be parity here right away; it will take time. At some point, however, if a balance isn’t reached, Alphabet et all will have to slow their AI-directed spending, and the Nvidia gravy train will dry up.
I think this recent dip is likely, in part, a reflection of this concern.
Despite the retreat, this isn’t the time to jump ship
It’s important to maintain a long-term investing horizon. Find a good company and stick with it, so long as the long-term thesis still holds. Certainly, there are exceptions, but this is not one of them; it is likely a blip in the long-term trajectory of Nvidia. The company is still positioned at the very center of a market that could be absolutely massive.
Big tech is gearing up to spend upward of $1 trillion on AI in the coming years, mostly focused on building out data centers. Guess what’s one of the most essential and expensive parts of a data center — the very chips that Nvidia makes. Even if AI fails to deliver in the way it needs to, it will take years before big tech backs off its investments.
Only time will tell if the promise of AI becomes a reality, but at this point, Nvidia still looks like a solid bet.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.
Nvidia Stock Just Dropped More Than 18% In 15 Days. Should Investors Be Worried? was originally published by The Motley Fool
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