Nvidia share price plunge has one major explanation

Published

7 months ago

June 26, 2024

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Just one week ago, Nvidia became the world’s most valuable company.

The chipmaker – whose shares had risen nine-fold since the end of 2022 – overtook Microsoft as its stock market valuation reached $3.34trn (£2.63bn).

Since then, the shares have fallen by 13%, declining in each of the last three trading sessions.

That has been enough to clip more than $500bn (£394bn) from Nvidia’s stock market valuation reached when, last Thursday, the shares hit an all-time intra-day high of $140.76 (£110.94) each (taking into account the 10-for-one share split completed earlier this month).

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To put that into context, Exxon Mobil – the 14th biggest company in the S&P 500 index and itself one of only a dozen companies ever to achieve the status of the world’s most valuable company – has a stock market valuation of $511bn.

So what is going on?

There are a number of factors at play.

The first is profit-taking. Nvidia shares, prior to last Thursday, had enjoyed a fantastic run and had attracted a lot of hot money from so-called “momentum buyers” who see a stock moving higher and jump on board to profit from the ride.

It was natural for such buyers to lock in profits by selling.

Added to that is that speculative money has moved on. A report published over the weekend in the Wall Street Journal that Meta Platforms, the parent of Facebook, has held talks with Apple about integrating Meta’s generative AI model into the recently unveiled Apple Intelligence system sent shares in both higher as profits from Nvidia’s recent strong run were recycled.

That money has not left the market – it has simply been redeployed from Nvidia to other stocks, not least Meta and Apple, but also elsewhere.

That can be shown by the fact that the sell-off in Nvidia, while also dragging down peers such as Broadcom, Taiwan Semiconductor, and Super Micro Computer (a server maker which is a heavy buyer of Nvidia’s chips), did not lead to a wider sell-off.

The Dow Jones, admittedly not as good a barometer of the US stock market as the S&P 500, hit its highest level for a month on Monday even as the S&P 500 and Nasdaq, both of which have a heavier weighting in Nvidia, were falling.

Also contributing to the sell-off was the revelation – via a filing to the main US financial regulator, the Securities & Exchange Commission – that Jensen Huang, Nvidia’s founder and chief executive, has taken advantage of the recent rise in the share price to reduce his holding.

Mr Huang, who founded Nvidia in 1993, sold just under $95m (£74.9m) worth of shares between Thursday 13 June and Friday 21 June. Nor is Mr Huang – who still owns more than 866 million shares in Nvidia worth $102.3bn (£80.3bn) at Monday evening’s closing price – the only director to have been selling recently.

Mark Stevens, a veteran venture capitalist who has been on the Nvidia board since 2008, has offloaded $28m (£22m) worth of shares this month while Tench Coxe, another VC who was one of Mr Huang’s earliest backers and who has been on the board since the start, has sold $119.5m (£94.1m) worth.

Selling by directors is not always a reliable guide to a company’s prospects. Sometimes it reflects personal factors, such as a divorce or estate planning, rather than indicating what a director thinks of a company’s prospects. Rightly or wrongly, though, it is usually taken as a negative signal.

Perhaps the most significant factor in the sell-off, though, is that some investors have been looking at Nvidia through traditional investment yardsticks.

The main one of these is the price/earnings (P/E) ratio. The higher the P/E ratio is, the more expensively a stock is valued.

Last week, after its latest gains, shares of Nvidia were changing hands at 45 times expected earnings.

To put that in context, the forward P/E of the S&P 500 is 22 times and the Nasdaq only slightly more. Put another way, investors were ascribing more than twice the value to Nvidia’s future earnings as they were to those of its peers.

Moreover, as the influential investment magazine Barron’s pointed out at the weekend, Nvidia was being valued at some 20 times its expected sales for the year to the end of January 2026 – a racy valuation, to say the least.

Stocks with those kinds of valuation have to justify it with spectacular earnings growth.

Yet, as Barron’s columnist Eric Savitz pointed out, Nvidia’s quarter-on-quarter earnings growth has, over the last four quarters, slowed from 88% to 34% to 22% to 18%. Now, quarter-on-quarter earnings growth of 18% is still pretty spectacular. But it does not quite justify a price/earnings multiple that has gone from 25 to 45 over the last year.

Pointing out that from 1976 to 2020, stocks trading at P/E rations of over 15 tended to underperform, Mr Savitz added: “I know what you’re thinking. It’s different this time. This is AI! And sure, maybe AI really is the most important thing to happen in technology since cloud computing, or the internet, or mobile phones, or even the personal computer. But the numbers worry me.

“Nvidia’s market value is now nearly five times the industry estimate for next year’s global chip sales-yes, the total from every company worldwide. Microsoft has seven times the number of employees Nvidia does, and twice the sales. Apple has five times the staff, and triple the sales volume. Nonetheless, this past week, Nvidia’s market cap vaulted past them both.”

Mr Savitz was not the only investment columnist suggesting that, perhaps, Nvidia’s shares might be over-valued.

Some of Monday’s sell-off was also fuelled by the highly influential ‘Heard on the Street’ column in the Wall Street Journal which, at the weekend, invited readers to cast their minds back to the dot-com bubble at the beginning of the century and, in particular, to the gyrations seen at that time in shares of Cisco Systems.

Cisco, the Journal reminded its readers, was favoured along with stocks such as IBM, Lucent and Intel – companies whose hardware were at the forefront of connecting households and businesses to the internet. By the end of 1999, it had become the world’s most valuable company.

The comparison with Cisco has undoubtedly dented sentiment towards Nvidia in some quarters.

Pointing out that today Cisco is now valued at 40% less than it was back then, the Journal highlighted that, at its peak in March 2000, Cisco shares were valued at 131 times forward earnings despite a less impressive financial performance than that recently shown by Nvidia.

Stressing that Nvidia was not is frothily valued as Cisco had been, the column added: “That doesn’t necessarily make Nvidia’s shares safe at their current level, though.

“The stock has seen a big influx of individual investors since the company’s latest financial results last month. Daily retail inflow has averaged nearly $141m since the earnings compared with a daily average of about $39m during the month prior, according to Vanda Research.

“Sell-side analysts are also getting rather exuberant. Several have pushed up their price targets since the stock’s 10 June split. And at least four of those targets are now at $160 and higher, which would put Nvidia’s market capitalization near $4trn at its current share count.

“Nvidia may be the top gun of AI, but investors should be careful not to write checks the stock can’t cash.”

Quite so.

AI is still a nascent technology and it is impossible to know, from here, who may be the greatest winners from it over time.

Just as investors back in 1999, trying to predict who would be the world’s biggest winners from widespread adoption of the internet, could not have known.

US

Donald Trump says he’s ‘totally innocent’ and thanks judge moments before no-penalty sentence in hush money case

Published

2 hours ago

January 10, 2025

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Donald Trump says he's 'totally innocent' and thanks judge moments before no-penalty sentence in hush money case

Donald Trump has been handed a no-penalty sentence following his conviction in the Stormy Daniels hush money case.

The incoming US president has received an unconditional discharge – meaning he will not face jail time, probation or a fine.

Manhattan Judge Juan M Merchan could have jailed him for up to four years.

The sentencing in Manhattan comes just 10 days before the 78-year-old is due to be inaugurated as US president for a second time on 20 January.

Trump appeared at the hearing by video link and addressed the court before he was sentenced, telling the judge the case had been a “very terrible experience” for him.

He claimed it was handled inappropriately and by someone connected with his political opponents – referring to Manhattan district attorney Alvin Bragg.

As it happened:
Trump sentenced in Manhattan court

Trump said: “It was done to damage my reputation so I would lose the election.

“This has been a political witch hunt.

“I am totally innocent. I did nothing wrong.”

Concluding his statement, he said: “I was treated very unfairly and I thank you very much.”

The judge then told the court it was up to him to “decide what is a just conclusion with a verdict of guilty”.

He said: “Never before has this court been presented with such a unique and remarkable set of circumstances.

“This has been a truly extraordinary case.”

He added that the “trial was a bit of a paradox” because “once the doors closed it was not unique”.

Prosecutor Joshua Steinglass had earlier argued in court that Trump “engaged in a campaign to undermine the rule of law” during the trial.

“He’s been unrelenting in his attacks against this court, prosecutors and their family,” Mr Steinglass said.

“His dangerous rhetoric and unconstitutional conduct has been a direct attack on the rule of law and he has publicly threatened to retaliate against the prosecutors.”

Mr Steinglass said this behaviour was “designed to have a chilling effect and to intimidate”.

It comes after the US Supreme Court rejected a last-ditch attempt by Trump to delay sentencing in the case on Thursday.

Trump’s lawyers argued that evidence used during the trial violated last summer’s Supreme Court ruling giving Trump broad immunity from prosecution over acts he took as president.

Trump’s hush money conviction in May 2024 means he will become the first person convicted of a felony to assume the US presidency.

He was found guilty in New York of 34 counts of falsifying business records relating to payments made to Ms Daniels, an adult film actor, before he won the 2016 US election.

Prosecutors claimed he had paid her $130,000 (£105,300) in hush money to not reveal details of what Ms Daniels said was a sexual relationship in 2006.

Trump has denied any liaison with Ms Daniels or any wrongdoing.

The trial made headlines around the world but the details of the case or Trump’s conviction didn’t deter American voters from picking him as president for a second time.

What is an unconditional discharge?

Under New York state law, an unconditional discharge is a sentence imposed “without imprisonment, fine or probation supervision”.

The sentence is handed down when a judge is “of the opinion that no proper purpose would be served by imposing any condition upon the defendant’s release”, according to the law.

It means Trump’s hush money case has been resolved without any punishment that could interfere with his return to the White House.

Unconditional discharges have been handed down in previous cases where, like Trump, people have been convicted of falsifying business records.

They have also been applied in relation to low-level offences such as speeding, trespassing and marijuana-related convictions.

US

US announces it will increase steps to limit revenue of Venezuelan president Maduro – as he begins third term

Published

2 hours ago

January 10, 2025

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US announces it will increase steps to limit revenue of Venezuelan president Maduro - as he begins third term

The US has announced it has increased its reward for information leading to the arrest of Venezuelan President Nicolas Maduro.

In a statement on Friday, the US treasury said up to $25m is being offered for information leading to the arrest of Mr Maduro and his named interior minister Diosdado Cabello.

Up to $15m is also being offered for information on the incoming defence minister Vladimir Padrino. Further sanctions have also been introduced against the South American country’s state-owned oil company and airline.

The reward was announced as Mr Maduro was sworn in for a third successive term as the Venezuelan president, following a disputed election win last year.

Elvis Amoroso, head of the National Electoral Council, said at the time Mr Maduro had secured 51% of the vote, beating his opponent Edmundo Gonzalez, who won 44%.

But while Venezuela’s electoral authority and top court declared him the winner, tallies confirming Mr Maduro’s win were never released. The country’s opposition also insists that ballot box level tallies show Mr Gonzalez won in a landslide.

Nationwide protests broke out over the dispute, with a brawl erupting in the capital Caracas when dozens of police in riot gear blocked the demonstrations and officers used tear gas to disperse them.

More than 2,000 demonstrators were arrested, and Mr Gonzalez fled to Spain to seek asylum in September.

While being sworn in at the national assembly, Mr Maduro said: “May this new presidential term be a period of peace, of prosperity, of equality and the new democracy.”

He also accused the opposition of attempting to turn the inauguration into a “world war,” adding: “I have not been made president by the government of the United States, nor by the pro-imperialist governments of Latin America.”

Lammy: Election ‘neither free nor fair’

The UK and EU have also introduced new sanctions against Venezuelan officials – including the president of Venezuela’s supreme court Caryslia Beatriz Rodriguez Rodriguez and the director of its criminal investigations department Asdrubal Jose Brito Hernandez.

Foreign Secretary David Lammy said Mr Maduro’s “claim to power is fraudulent” and that last year’s election “was neither free nor fair”.

“The UK will not stand by as Maduro continues to oppress, undermine democracy, and commit appalling human rights violations,” he added.

Mr Maduro and his government have always rejected international sanctions as illegitimate measures that amount to an “economic war” designed to cripple Venezuela.

Those targeted by the UK’s sanctions will face travel bans and asset freezes, preventing them from entering the country and holding funds or economic resources.

US

Donald Trump says Vladimir Putin wants to meet – and that he and Barack Obama ‘probably’ like each other

Published

8 hours ago

January 10, 2025

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Donald Trump says Vladimir Putin wants to meet - and that he and Barack Obama 'probably' like each other

Donald Trump says a meeting is being set up between himself and Vladimir Putin – and that he and Barack Obama “probably” like each other.

Republican US president-elect Mr Trump spoke to reporters at his Mar-a-Lago resort in Florida on Thursday, saying Russian president Mr Putin “wants to meet, and we are setting it up”.

“He has said that even publicly and we have to get that war over with. That’s a bloody mess,” Mr Trump said.

Ukraine war latest updates

Kremlin spokesperson Dmitry Peskov said on Friday there was a “mutual desire” to set up a meeting – but added no details had been confirmed yet and that there may be progress once Mr Trump is inaugurated on 20 January.

“Moscow has repeatedly declared its openness to contacts with international leaders, including the US president, including Donald Trump,” Mr Peskov added.

“What is required is a mutual desire and political will to conduct dialogue and resolve existing problems through dialogue. We see that Mr Trump also declares his readiness to resolve problems through dialogue. We welcome this. There are still no specifics, we proceed from the mutual readiness for the meeting.”

Trump on Obama: ‘We just got along’

Mr Trump also made some lighter remarks regarding a viral exchange between himself and former Democrat President Barack Obama at Jimmy Carter’s funeral on Thursday.

The pair sat together for the late president’s service in Washington DC on Thursday, and could be seen speaking for several minutes as the remaining mourners filed in before it began.

Mr Obama was seen nodding as his successor spoke before breaking into a grin.

Asked about the exchange, Mr Trump said: “I didn’t realise how friendly it looked.

“I said, ‘boy, they look like two people that like each other’. And we probably do.

“We have a little different philosophies, right? But we probably do. I don’t know. We just got along. But I got along with just about everybody.”

The amicable exchange comes after years of criticising each other in the public eye; it was Mr Trump who spread the so-called “birther” conspiracy theory about Mr Obama in 2011, falsely asserting that he was not born in the United States.

Insults continued for years, with Mr Obama famously dedicating much of his final White House Correspondents’ Dinner speech in 2016 to jokes at his political rival’s expense.

Mr Trump has repeatedly attacked the Obamas, saying the former president was “ineffective” and “terrible” and calling former first lady Michelle Obama “nasty” as recently as October last year.

On Kamala Harris’s campaign trail last year, Mr Obama said Mr Trump was a “78-year-old billionaire who has not stopped whining about his problems since he rode down his golden escalator nine years ago”, while the former first lady said that “the consequences of him ever being president again are brutally serious.”