AI Chip Sector Crashes, Wall Street Cash Shifts to Software!
On Tuesday, $NVIDIA Corp(NVDA)$ dropped 9.53%. Bloomberg reported that Nvidia is facing an escalated antitrust investigation, with the U.S. Department of Justice issuing subpoenas.
The DOJ, now gathering evidence of Nvidia’s alleged antitrust violations, has sent subpoenas to Nvidia and other companies, intensifying the investigation into this AI computing leader. Sources say the DOJ has moved from issuing questionnaires to making legally binding demands for information, signaling a step closer to formal charges.
Concerns include Nvidia allegedly making it harder for customers to switch to other vendors and punishing those using alternative AI chips.
Investigators are checking if Nvidia’s sales tactics involve forcing purchases of additional products or commitments not to buy from competitors. Some customers and rivals accuse Nvidia of locking in users by bundling critical software with its chips.
From AI to Software
Following Nvidia’s less-than-stellar earnings report last week, the fallout continues. Semiconductor stocks have fallen every September for the past four years, averaging a 4.6% drop. Recently, there’s been a reversal in client investments, with funds moving out of semiconductors and into software. AI-related controversies have notably increased in the past few months.
U.S. stocks suffered another major hit, with the $NASDAQ(.IXIC)$ falling over 3% on Tuesday, and Nvidia dropping as much as 10.1%. The $Philadelphia Semiconductor Index(SOX)$ plunged nearly 7.8%, marking the biggest drop since the “Black Monday” on August 5, and the second-largest decline this year. The $VanEck Semiconductor ETF(SMH)$ fell 7.5%, its biggest drop since March 2020.
Multiple Factors
Goldman Sachs tech trader Peter Bartlett said the semiconductor sector’s collapse is "the most asked-about issue" from clients. Unfortunately, Bartlett admited there’s no satisfying explanation for September’s poor start. However, he pointed out that Tuesday’s drop was influenced by several factors:
-Nvidia's Post-Earnings Impact: After Nvidia’s earnings report, there was significant pressure.
The Q2 and Q3 EPS guidance beat estimates but fell short of previous surprises, and gross margins were normalizing.
Some high-profile buyers reduced their Nvidia holdings after the earnings release.
Nvidia’s stock dropped over 7% at one point, the biggest decline since April, setting the stage for further selling.
-Seasonal Effects: Semiconductor stocks have historically fallen every September for the past four years, averaging a 4.6% drop.
-Industry Developments: Reports suggest OpenAI is developing new AI chips and xAI might have completed its data center. While this is positive for $Taiwan Semiconductor Manufacturing(TSM)$ , which stock also fell sharply on Tuesday, dropping nearly 7%.
-Upcoming Industry Data: $Broadcom(AVGO)$ is set to release earnings this Thursday. Citi’s TMT conference starts Tuesday, Goldman Sachs’ Communacopia & Technology conference is next week, and Nvidia CEO Jensen Huang will speak next Wednesday.
Bartlett noted that despite the rough start to September, client feedback doesn’t indicate severe distress. Investors have significantly reduced their semiconductor holdings, especially hedge funds. Goldman Sachs’ top TMT expert, Peter Callahan, mentioned that AI-related controversies have notably increased compared to the past few months.
Bartlett also highlighted a noticeable shift in client funds. Goldman Sachs’ trading data shows active clients are selling semiconductors and buying software: “While our department’s flows weren’t very busy at first, we’ve seen a clear move from semiconductors to software.”
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