Nvidia plunged 9.5%, with a market value evaporating by $278.9 billion, the largest drop in U.S. stock history. What happened?

Author: Du Yu, Wall Street Journal

On Tuesday, September 3, the first trading day of September after the long weekend in the U.S. stock market, "tragic" became a rather fitting description, with "plummeting" also applicable as Nvidia and a host of chip stocks led the decline throughout the day.

Nvidia gapped down 2.8% at the open, then continued to drop, closing down 9.5%, with its stock price falling to nearly $108, the lowest in three weeks since August 9, and a market value shrinkage of $279 billion, further distancing its total market cap from the $3 trillion mark. The Nvidia double-leveraged ETF fell about 19%.

The Philadelphia Semiconductor Index, a benchmark for the industry, plummeted 7.8%, breaking through the 5100 to 4800 integer points, reaching its lowest level in three weeks since August 12. The ETF tracking this benchmark, SMH, fell 7.5%, marking the largest single-day drop in over four years.

Other chip stocks fared poorly as well. Intel, which competes directly with Nvidia, fell nearly 9%, distancing itself from a one-month high, while AMD dropped nearly 8% to a three-week low. The largest chip foundry, TSMC, saw its U.S. stock drop 6.5%, and another major foundry, GlobalFoundries, fell 8.6%. Chip equipment manufacturers KLA dropped 9.5%, Applied Materials fell 7%, and ASML dropped 6.5%. Qualcomm fell 6.9%, and Broadcom, which will release its Q3 report on Thursday, dropped over 6%. ARM, which had risen against the trend when Nvidia fell last Thursday, also dropped nearly 7%.

One reason for the chip stock crash: Poor manufacturing data, leading to a sell-off ahead of major employment reports

Market analysis indicates that the sharp decline in chip stocks today was in line with the broader downturn in the U.S. stock market.

U.S. stock indices recorded their largest drop since August 5, when strong concerns about a U.S. economic recession were triggered by the July non-farm payrolls. On Tuesday, both U.S. manufacturing data for August continued to show signs of contraction, reigniting investor fears about a slowdown in the U.S. economy and triggering a market sell-off.

The Nasdaq 100 index, which is heavily weighted in tech stocks, saw its decline widen to 3%, while the Nasdaq itself dropped over 3% to its lowest level since August 12. The S&P 500 index fell over 2% to its lowest since August 14, and the Dow Jones Industrial Average, which comprises blue-chip stocks, fell 1.5% or over 620 points, slipping below 40,000 points to its lowest since August 22. The "fear index" VIX, which measures short-term volatility of the S&P, surged over 40%, approaching 22.

Jordan Klein, an analyst at Mizuho Securities, stated that with the increasing risk of a "hard landing" for the economy, investors may wish to reduce their exposure to semiconductor stocks.

Barron's Weekly cited Dow Jones market data indicating that the "seven sisters" of U.S. tech stocks fell as much as 7.6% during the day, marking the largest percentage drop since April 19:

"This sell-off appears to be part of a sector rotation rather than driven by specific news in the chip industry. September is often a tough month for the stock market, and investors seem intent on selling stocks ahead of a series of economic data releases."

Secondly, Nvidia's stock has been on a downward trend since it released its earnings report after the market close last Wednesday, highlighting concerns about the company's high valuation, slowing revenue growth guidance, and the sustainability of the overall AI chip investment boom, which in turn dragged down chip and AI stocks.

Bill Blain, founder and senior strategist at Wind Shift Capital, stated that Nvidia's stock decline is sending a strong "sell" signal to U.S. investors, and its past significant rise and huge valuation may indicate that the 40-year market cycle has peaked:

"I just found the best reason to sell Nvidia, confirming that we are at the market top. What happens next? As countries compete for strategic resources, rising inflation, increasing interest rates, and a global commodities supercycle are about to weigh down the stock market over the next twenty years."

Another reason for the chip stock crash: Weak chip sales data, pressuring industry outlook

Another contributing factor to the pressure on chip stocks is the semiconductor industry association (SIA) releasing July chip sales data that fell below seasonal trends, indicating signs of industry weakness.

UBS analyst Timothy Arcuri analyzed that chip sales fell 11.1% in June and July, below the 5-year and 10-year averages.

Arcuri pointed out:

"Memory is the main downward factor, with declines in major sub-markets, including MCUs (microcontrollers), DSPs (digital signal processors), and analog chips, all worse than their respective seasonal trends over the past 5 and 10 years."

Morgan Stanley's analysis indicated that this report was "weaker than our expectations across almost all product lines," stating:

"The overall market still looks weak, although we believe that sales in areas like analog chips, discrete devices, and MCUs may have bottomed in Q2, the subsequent recovery is likely to be limited."

Why Nvidia drags down chip stocks: Its earnings report raises doubts about the sustainability of massive AI hardware investments

On one hand, despite Nvidia achieving solid results with revenue and EPS doubling year-on-year for the second quarter of fiscal year 2025 ending in July, based on a high base from the same period last year, its revenue guidance for the next quarter is $32.5 billion.

This represents a sharp slowdown in year-on-year revenue growth from triple-digit percentages over several consecutive quarters to nearly 80%, interpreted by some as a sign of cooling demand for its AI chips, which subsequently impacted the stock prices of chip manufacturers supplying memory and other components to Nvidia.

Over the past year, chip stocks led by Nvidia have surged primarily because of optimism that the new wave of artificial intelligence would require companies to purchase more semiconductors and memory to meet the growing computational demands of AI applications.

However, Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, pointed out that it is not surprising that Nvidia and other "market stars" in AI stocks have temporarily taken a back seat, as "the return on investment for all this spending is still a big question." The decline in chip stocks indicates skepticism about the sustainability of massive investments in AI computing hardware:

"Driven by significant investments from companies like Microsoft and Alphabet (in AI and chips), Nvidia and other chip manufacturers have seen a surge in revenue. However, the revenue growth these buyers are getting from (AI) spending is still relatively small, raising concerns about how long this situation can last."

This has also made Broadcom's earnings report on Thursday particularly noteworthy, as it could provide insight into whether the market's enthusiasm for the AI trend is waning.

Why Nvidia's solid Q2 report has led to a multi-day decline: Analysts say it is "digesting growth pains"

At the same time, for Nvidia itself, since the closing price before its earnings report on August 28, it has dropped 14% in less than a week, primarily because its earnings report, while solid, was "not outstanding," at least not good enough for Wall Street, which had extremely high expectations.

Ken Mahoney, CEO of Mahoney Asset Management, stated that the "angry reaction" to Nvidia's earnings report indicates that after witnessing its stock price soar over 700% since the beginning of 2023, investors have become accustomed to Nvidia's earnings reports not only exceeding market expectations but also "completely destroying" them, which has made Nvidia's stock "perfectly priced," leaving little room for error.

Bill Maurer, a columnist at the investment research site Seeking Alpha, believes that Nvidia's post-earnings price drop is "digesting some growth pains." Due to its stock price doubling over the past year, the expectations held by investors and analysts have become too high, leading to the smallest margin of revenue and profit exceeding market expectations in five quarters, reflecting the enormous challenge of meeting soaring expectations.

Moreover, Nvidia's stock price is currently far above the 200-day moving average level, "making the stock price quite high in the long run," coupled with the potential for a "buy the rumor, sell the fact" market dynamic after the Federal Reserve is expected to cut interest rates in September, all of which are unfavorable for Nvidia's high valuation:

"One question that investors and analysts will focus on in the coming quarters is gross margin. The non-GAAP gross margin for Q2 fell over 3 percentage points quarter-on-quarter, and it is expected to decline further in the second half of the fiscal year. Currently, profit margins are under pressure from the ramp-up of Blackwell production.

As we move forward, Nvidia's overall revenue growth will begin to slow slightly, as the year-on-year revenue challenges for each subsequent quarter will be significant, making it extremely difficult to maintain 100% or more revenue growth over the long term.

Whether Nvidia can meet these goals will depend on the ramp-up of Blackwell production, which has been delayed by a quarter to start in the fourth fiscal quarter of this year and will continue into fiscal year 2026.

During the conference call, management projected that Blackwell's revenue in Q4 would reach billions of dollars, and this figure should grow significantly next year, but analysts did not receive as much information as they had hoped, which may be one reason for the stock's pressure."

Mainstream analysts remain optimistic about Nvidia's long-term prospects, Musk hints at continued large-scale purchases of AI chips

However, despite Nvidia's recent stock price decline, most analysts still hold a "buy" rating on it, with target prices indicating some upside potential, and most remain optimistic about Nvidia's "long-term good prospects."

For example, Tesla CEO Elon Musk reminded this week that despite recent investor concerns, demand for Nvidia's existing product line remains strong. His AI startup xAI successfully launched the Colossus AI training infrastructure in just 122 days, powered by 100,000 Nvidia H100 GPUs, which will become "the world's most powerful AI training system," and will be integrated with Nvidia's H200 chips to achieve "doubling in scale" within months.

The investment research site The Motley Fool believes that the selling investors seem to overlook that Nvidia has achieved year-on-year growth in every business line outside of data centers, even in its once-struggling gaming division. In contrast, AMD's gaming chip sales fell nearly 60% year-on-year in Q2, indicating that even in a market where competitors are struggling, Nvidia can maintain strong demand:

"Furthermore, from a price-to-earnings (P/E) ratio perspective, Nvidia's valuation does not seem too high compared to major competitors AMD and Intel.

The strength of its business demonstrated in the earnings report also convinces that Nvidia will capture 70% to 95% of the AI GPU market share. The AI industry is expected to grow from $136 billion last year to $826 billion by 2030, allowing long-term investors to enjoy years of growth in the industry and reap returns from holding Nvidia stock."