Nvidia, chip stocks waver after previous day’s sell-off

(Reuters) – Chip companies led by market cap leader Nvidia (NASDAQ:) were set to extend losses on Wednesday after a bruising sell-off in the previous session, reflecting the growing concern on Wall Street over the stocks’ lofty valuations as AI optimism cools.

Nvidia fell 1.6% in premarket trading after Tuesday’s 9.5% decline wiped out $279 billion from its market value, the biggest ever single-day decline for a U.S. company.

Enthusiasm around the growth of artificial intelligence technologies has propelled much of the equity market’s gains this year, lifting the valuation of chip companies to levels some investors consider inflated.

Worries around a slow payoff from hefty AI investments have mounted, and Nvidia’s forecast last Wednesday fell short of lofty expectations even though the company posted strong quarterly revenue growth.

Other chip stocks, including Arm Holdings (NASDAQ:), Micron Technology (NASDAQ:), Qualcomm (NASDAQ:) and Broadcom (NASDAQ:), were down between 0.5% and 1.5% on Wednesday in premarket action. U.S.-listed shares of TSMC, Nvidia’s chip manufacturing partner, slid 1.5%.

“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,” said Tai Hui, Asia chief market strategist at J.P. Morgan Asset Management in Hong Kong.

Since peaking on June 18, Nvidia’s shares have lost roughly 20% of their value. Its forward price-to-earnings ratio now sits just below 30, representing a decline in its valuation. The stock, however, is up more than 650% since the start of 2023.

“The whole AI development…is very promising. It’s just the question of … how are companies going to monetise all this development, how do we justify all this capex that is going in right now? Investors are just waiting for that answer.”

Nvidia shares are also taking a hit after Bloomberg News reported the U.S. Department of Justice sent a subpoena to the company, deepening its probe into the AI heavyweight’s antitrust practices.

Analysts have warned that regulatory scrutiny into Nvidia could step up further. The company last week disclosed requests for information from U.S. and South Korean regulators.

“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 its fingers are in multiple pies,” said Dan Coatsworth, investment analyst at AJ Bell.

“Regulators might want to know if it is giving preferential treatment to these investee companies or to customers who exclusively use its chips.”