By Tae Kim
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Not Easy. Hi everyone. I'm sure you saw the news. On Tuesday, Nvidia's stock price dropped 9.5%, erasing $279 billion in shareholder value -- the largest daily market cap loss for any U.S. company ever.
Headlines, including one from Barron's , flagged the big moment. But I want to provide some additional context because history suggests the big move, while flashy, doesn't ultimately mean much.
Since Nvidia began its tremendous artificial-intelligence-driven run around the debut of ChatGPT in November 2022, the stock has soared more than six times. But the big move up has been coupled with multiple short declines.
In fact, Nvidia has now accounted for eight of the top 10 largest one-day market cap declines on record. Simply put, as the stock has gained heft, the numbers have gotten much bigger.
Pair that with the fact that Nvidia is a high-growth semiconductor stock, and massive market value moves are all but inevitable. A mid-single digit percent move on a multitrillion-dollar market cap equals a big number. It's just math.
Sure enough, Nvidia has also been responsible for five of the top 10 one-day market value gains, including the largest increase ever -- a gain of $327 billion on July 31. Win some, lose some.
Among the largest U.S. companies, Nvidia stands out. There are two other U.S. firms worth more than $2 trillion -- Apple and Microsoft. But both of them are more mature businesses that don't come close to Nvidia's 122% revenue growth rate in its latest quarter.
After each of Nvidia's historic one-day declines, the stock has eventually rebounded. It's better not to read much into the incidents.
Tuesday's move, for what it's worth, wasn't tied to corporate fundamentals. It seemed mainly driven by a rotation out of growth stocks after a mixed manufacturing report from the Institute for Supply Management.
Despite the drop, Nvidia remains the best-performing stock in the S&P 500 this year, up 107%. The No. 2 performer, Vistra, is up 91%.
The reality is that the best-performing stocks don't go up 1% or 2% every day with no volatility. Investing in those names requires getting comfortable with big moves -- both up and down.
Nvidia, of course, will eventually see a longer-term drop. Someday, revenue growth will decline materially, and the share price will falter in a big way. I believe the primary potential catalyst for that slowdown is in the area of AI training.
Nvidia has said that more than 40% of its data center revenue comes from graphics processing units, or GPUs, used for large-language model inference -- the process of generating answers from those AI models. That means the rest of its sales are for training cutting-edge AI models.
At some point, those AI models will become more mainstream and that training will slow. But not soon. Just last week, Nvidia CEO Jensen Huang said the company's customers were still seeing the benefits of scaling up AI models, meaning there's plenty of incentive for Nvidia customers to keep on buying.
As long as next-generation AI models continue to improve, demand for Nvidia's GPUs should stay robust -- and its stock should continue to hit new highs.
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Write to Tae Kim at tae.kim@barrons.com or follow him on X at @firstadopter.
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September 06, 2024 14:18 ET (18:18 GMT)
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