The Nvidia (NASDAQ:NVDA) share price has fallen 20% in the last seven market days. A fall between 10% and 20% is typically dubbed a correction, with more than 20% often considered a crash. Nvidia is down 23% since its 52-week high.
The AI chip maker has lost around $600m in market cap, or about three times the value of Shell. It’s still at more than $2.9bn though, which is an eye-watering amount. Have the past 12 months seen a huge over-inflating bubble, and is it deflating rapidly now? We need to look closer at what’s been happening.
Chinese competition
The release of the latest DeepSeek artificial intelligence (AI) model from China caused a huge upset, when the developers claimed they’d trained it for less than $6m in only two months. It also uses older and less expensive Nvidia chips, as exports of newer ones to China are restricted.
So, the Chinese can do it without spending billions, and using cheaper chips? That’s bad news for AI pioneers like OpenAI, Meta and the rest — or is it? Microsoft and OpenAI are hot on the track of claims that DeepSeek cheated, with suggestions that individuals were seen “exfiltrating a large amount of data” from the OpenAI API.
It could be a while before the dust settles on this dispute. In the meantime, Alibaba has launched its own new AI offering, claiming it’s better than DeepSeek and OpenAI’s ChatGPT. But whoever gets the software right, it all still needs huge numbers of Nvidia ships, right?
Trump Tariffs
The US was already blocking some chip exports to China, and President Trump’s new import tariffs suggest Chinese developers might look elsewhere. It’s still a short-term thing, and it’s hard to tell whether this new trade war will last for four days or four years. But with retaliation seeming inevitable, there’s added impetus for global developers to drive technology progress outside the US.
AI silicon, however, is quite a tricky thing to get into. If it wasn’t for its decades of parallel-processing graphics chip history, Nvidia wouldn’t be leading the field today.
And despite the stock’s fall, we’re still looking at a forecast price-to-earnings (P/E) ratio of 42, dropping as low as 22 by 2027 based on rising earnings forecasts. Is that a bubble stock valuation? Not in my books.
Sentiment shift?
I wonder if we’re at a pivot point in ‘father of value investing’ Benjamin Graham‘s observation that “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Sentiment-driven momentum can dictate stock prices in the short term. But the longer we wait, the more markets turn to rational analysis.
The long-term threat to Nvidia surely has to come from AI chip developments from competitors like Intel and Advanced Micro Devices. And maybe Chinese technology. CPU leadership changed multiple times in past decades, and the same could happen with AI chips.
In the long term, I’m cautiously bullish over Nvidia even with the competitive risk. But I reckon anything could happen in the next few months. I’ll stay out, at least for now.
This post was originally published on Motley Fool
