(Reuters) – Chip companies led by market leader Nvidia were expected to extend losses on Wednesday following a sharp sell-off in the previous session, reflecting growing concerns on Wall Street about the stocks’ high valuations as AI optimism fades.
Nvidia fell 1.6% in premarket trading after a 9.5% decline of $279 billion on Tuesday, the biggest single-day loss by a U.S. company.
Excitement over the development of artificial intelligence technologies has driven much of the stock market gains this year, pushing up chipmakers’ valuations to levels that some investors consider excessive.
Concerns grew that the company’s heavy investments in artificial intelligence would be slow to pay off, and Nvidia’s forecast last Wednesday fell short of lofty expectations, even though the company reported strong revenue growth in the quarter.
Other chip stocks, including Arm Holdings, Micron Technology, Qualcomm and Broadcom, lost between 0.5 and 1.5 percent in premarket trading on Wednesday. U.S.-listed shares of TSMC, Nvidia’s chip manufacturing partner, lost 1.5 percent.
“The focus is now shifting to valuations of the U.S. equity market in general, and some of the technology stocks have built in quite high premiums,” said Tai Hui, chief Asia market strategist at JP Morgan Asset Management in Hong Kong.
Since its peak on June 18, Nvidia shares have lost about 20% of their value. The price-to-earnings ratio is now just under 30, indicating a decline in valuation. However, since the start of 2023, the stock has risen more than 650%.
“The whole AI development is very promising. It’s just a question of how companies are going to monetize this development, how we justify all this capital expenditure that is currently being made. Investors are just waiting for that answer.”
Nvidia shares are also tumbling after Bloomberg News reported that the U.S. Department of Justice sent the company a subpoena, deepening its investigation into the AI giant’s antitrust practices.
Analysts warn that regulatory scrutiny of Nvidia could increase even further. The company last week disclosed requests for information from US and South Korean regulators.
“Nvidia is not only the biggest player in the AI chip market, but it has also invested in a large number of other AI companies, meaning the company has its fingers in many different pies,” said Dan Coatsworth, investment analyst at AJ Bell.
“Regulators may want to know whether the company gives preferential treatment to these affiliates or customers who exclusively use its chips.”
(Reporting by Deborah Sophia in Bengaluru; Editing by Arun Koyyur)
