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Nvidia in Correction Territory, Approaches Bear Market

Shares of Nvidia (NVDA) have slumped in the past few days, taking the stock down over 10% and into a technical correction. On Tuesday, 17 December, NVDA stock slid further into correction, declining -1.2% to a more than 2-month low.

The chipmaker has been at the forefront of the artificial intelligence super trend this year as major tech companies stocked up on the latest microchips to support the development of large language models. As such, despite the correction, Nvidia stock is still up a staggering 170% in 2024. Let’s take a closer look at Nvidia’s latest performance:

3D candlestick chart over semiconductor

NVDA Stock Down Over 10% From Record

After peaking at just around $150 on 21 November, Nvidia’s stock price has fallen over $20 to under $130 as of 17 December. In doing so it has formed a Head and Shoulders reversal pattern with a neckline around $132. As of Tuesday, the price dropped below the neckline, which is to be taken as a bearish signal according to some technical analysts.

However, the drop has taken the stock back to its 100-day moving average, a technical indicator that has been considered a place of value for the shares over the past year.

Nvidia stock price chart on 18/12/2024

What’s Causing Nvidia Stock to fall?

While there appears to be no outright explanation, analysts have pointed to a couple of possible causes of the technical correction in Nvidia stock. 

  1. Chip demand

  2. China Trade War

Chip Demand

Microsoft (MSFT) is thought to be Nvidia's largest customer, accounting for an estimated 20% of its revenue. In a B2 podcast interview, Microsoft CEO, Satya Nadella, suggested that the frenzy for AI chips might be easing. Asked if Microsoft was still "supply constrained" in AI technology, he replied, "I am power constrained, not chip supply constrained," indicating a shift in the supply-demand balance.  

But while Nadella's comments highlight easing supply constraints, this doesn't necessarily signal waning demand for Nvidia GPUs.

China Trade War

According to the Chinese government, on 9 December, China's State Administration for Market Regulation launched an investigation into Nvidia concerning its acquisition of Mellanox. Some see this as retaliation against the US for restricting Nvidia and other major semiconductor companies from selling their most advanced AI chips to China, leaving Nvidia possibly in the middle of a trade war over AI dominance between the US and China.

Some Reasons for Optimism

In spite of the short-term setback in the share price, some note that there could still be many reasons to stay bullish on the stock long term, which include:

  • Blackwell processors are driving Nvidia's growth in AI-powered chips

  • Profit margins are expected to stay in the low 70% range

  • Nvidia is generating significant free cash flow, with some earmarked for share buybacks

Bullish Analyst Outlook

Wall Street analysts remain optimistic about Nvidia’s prospects, driven by the anticipated success of its Blackwell processors. These chips are positioned to dominate the market for AI-powering hardware, potentially adding billions to Nvidia’s quarterly revenue and significantly boosting its annual topline over the next financial year.

Strong Profit Margins

Nvidia's profit margins are expected to remain robust, holding steady in the low 70% range despite production constraints and supply chain challenges. To put the sheer scale of the company’s profit growth into context, Nvidia’s net income in fiscal 2023 was $4.37 billion. By fiscal 2026, that figure is forecast to skyrocket to $102 billion.

Cash Flow and Share Buybacks

Nvidia’s strong financial position, with minimal debt, means it has been generating massive free cash flow. From the estimated $62 billion in free cash flow generated over the upcoming fiscal year, $36 billion is expected to be allocated to stock buybacks. So even if demand for shares from investors drops off, the company itself could invest in direct returns to shareholders. (Source: The Street)

Conclusion: What’s Next for Nvidia Stock?

Nvidia stock has entered a technical correction, dropping over 10% from recent highs amid easing AI chip demand signals and year-end portfolio adjustments. Despite the pullback, Nvidia remains up significantly for the year, reflecting its leadership in AI-powered hardware and robust growth potential. With strong profit margins, significant free cash flow, and bullish analyst sentiment, the stock may continue to offer long-term optimism despite the short-term volatility. However, only time will tell what actually lies ahead for this tech giant.

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