Investing

Here’s Why NVIDIA Has Dropped 10% While the Market Rallies

Eric Bleeker

Published: July 18, 2024 9:08 am

Last Updated: July 18, 2024 9:09 am

Across the market, tiny stocks have seen their strongest weekly gains for the year. Yet, last Thursday NVIDIA (Nasdaq: NVDA) lost $185 billion in value. Then yesterday, it followed up by losing $206 billion. If you’re an NVIDIA investor, this raises the question 1.) Is any NVIDIA news causing these sell-offs and 2.) Will this situation continue?

We analyze what’s been driving the NVIDIA sell-off and what it means for the broader market.

Key Points in This Discussion

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• The Russell 2000 has seen its greatest-ever outperformance versus the S&P 500 across the past week. Investors are rotating into stocks that have underperformed across the past year and out of large technology stocks.
• News impacting NVIDIA includes the potential for further trade restrictions from China. In total, expectations for NVIDIA’s profits in late 2024 and 2025 continue rising. The greatest near term threat to the company’s share price is multiple contraction. NVIDIA has recently been valued at 35X 2025 earnings. If that level falls, it could reduce NVIDIA’s share price even while their results keep improving.

You can read highlights from 24/7 Wall Street analysts Eric Bleeker and Austin Smith below.

• The Dow Jones is rallying. Small caps are rallying. And the stocks that have rallied across the past year like NVIDIA, are not joining the party. 
• So, the big question is what has changed? And could this spell the end of the rally in NVIDIA shares that dominated the stock market the past year?
• As of Wednesday, NVIDIA shares were trading a little below $120 per share. They closed the prior Wednesday at $135 per share. So, you’re looking at about a 10%-plus drop while many other stocks in the market are having their best week of the year. 
• So, let’s talk about what’s happening. 
• The first issue we need to discuss is the sector rotation to small caps. 
• Following Fed comments that moved up interest rate cut expectations last week, NVIDIA and its Magnificent 7 peers lost a combined $599 billion in value in a single day. 
• Zooming out further, the small cap Russell 2000 has now outperformed the Nasdaq-100 by 12% and the S&P 500 by 10% across the past week entering Wednesday. 
• The reason for this rotation is simply tech indices have outperformed dramatically and as a result, stocks in them are generally more expensive. This isn’t necessarily just a tech issue. You can look at an expensive retailer that’s included in the Nasdaq – Costco – and it saw a steep sell-off last Thursday as well. 
• The idea for investors is small caps are generally cheap, they’re beaten down valuation-wise, and they have a lot more to gain from the economy heating up. 
• The key area to watch if you’re an investor: Keep watching the difference between the IWM – which is the Russell 2000 – and measures like the Nasdaq-100, or QQQ. 
• Second, late on Tuesday night, Bloomberg reported the Biden Administration is considering getting tougher on semiconductor export controls. 
• The key point here is that before the prior export controls issued by the Biden administration, NVIDIA received 20% to 25% of its Data Center revenue from China. 
• Today that figure is closer to 5% 
• So, NVIDIA is seeing a drop along with most other chip companies. However, it’s worth noting they’ve already lost the vast majority of China’s contribution to their revenue and profits. 
• Now, the final question is where do we stand today. Could this ‘sector rotation’ out of tech stocks and into small caps continue?
• The honest answer is it’s hard to know how macro trends like investors moving in and out of big indexes are going to continue. 
• But there is an area you can watch if you’re an NVIDIA investor. 
• We’ve preached over and over that the valuation of big technology stocks like Amazon, Apple, Microsoft, and NVIDIA has coalesced. 
• Recently they’ve all been trading for about 30 to 35X next year’s earnings. 
• If that multiple stayed static, NVIDIA has had a good shot at getting to $150 per share by the end of the summer as Wall Street continued raising their price targets on the company’s share price. 
• The big area to watch is whether these forward valuations come down. If so, that’s going to begin taking some upside out of NVIDIA’s stock. 
• The bottom line: this China news has the potential to take sales away from NVIDIA, but China’s contribution has already sunk to mid-single digits. 
• The overall trend for NVIDIA in the past couple of weeks continues to be incredibly robust demand for its next-generation Blackwell systems. 
• That hasn’t shifted, but how the market is willing to value the company may have.
• So, that’s what I’m going to be watching – not only how NVIDIA is valued on a 2025 earnings basis, but how the rest of the Magnificent 7 is as well.

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Transcript:

Eric, I’m sure today a lot of investors are looking at their portfolios and wondering what’s changed in the market.

So the Dow Jones is rallying, small caps are rallying, and the stocks that have rallied across the past year, like NVIDIA, they’re not joining the party.

They’re left out in the cold.

They already had their celebration.

So the big question is, what has changed, and could this spell the end of the rally in NVIDIA shares that dominated the stock market this past year?

Yeah.

We’re filming this video.

It’s Wednesday afternoon.

NVIDIA shares are trading a little bit below 120 dollars per share.

They closed the prior Wednesday at 135 dollars per share.

So you’re looking at a 10 plus drop while many other stocks in the market prior to Wednesday, when there’s a more broad sell-off, have had their best week of the year.

So let’s talk about what’s happening.

The first issue we need to discuss is a sector rotation into small caps.

Following Fed comments that moved up interest rate cut expectations last week, NVIDIA and its magnificent seven peers, they lost by $599 billion in a single day, which was last Thursday.

We zoom out further, the small cap Russell 2000 has now outperformed the NASDAQ 100 by 12% and the S&P by 10%.

Across a week, that was last Wednesday to Tuesday.

The reason for this rotation is simply tech indices have outperformed dramatically as a result.

Stocks in them are generally more expensive.

This isn’t necessarily just a tech issue.

You can look at an expensive retailer that’s in the NASDAQ like Costco, and it saw a steep sell-off on Thursday as well.

The idea for investors is small caps are generally cheap.

They’re being down valuation-wise.

And they just have a lot more to gain from the economy heating up.

Now, the key area to watch if you’re an investor is to keep watching the difference between the IWM, which is the Russell 2000, and measures like the NASDAQ 100 or QQQ, if you want to type that ticker in.

Second, late on Tuesday night, Bloomberg reported the Biden administration is considering getting tougher on semiconductor export controls.

The key point here is that before prior export controls issued by the Biden administration, NVIDIA had received 20 to 25% of its all-important data center group revenue from China.

Today, that figure is closer to 5%.

So NVIDIA is seeing a drop along with almost every single other chip company.

A lot of them are down five to 10%, but it’s worth noting that they’ve already lost the majority of China’s contribution to their revenue and profits.

So there’s not as much to lose ahead as some other companies in the space.

And the final question that we need to answer today is, could this rotation continue?

The honest answer is, it’s really hard to know how macro trends like investors moving in and out of big indexes are gonna go, but this is the area to watch if you’re an NVIDIA investor.

I’ve preached over and over again, Austin, the valuation on big technology stocks like Amazon, Apple, Microsoft, NVIDIA, it’s actually kind of relatively coalesced.

They’ve all been trading somewhere in the range of 30 to 35 times 2025 earnings.

If that multiple stayed static, NVIDIA had a good shot at hitting $150 per share by the end of summer because Wall Street continues raising price targets and projections on just how much they can make in earnings next year.

The big area to watch is whether these four valuations come down.

If so, that’s going to take some upside out of all tech stocks, NVIDIA included, because the bottom line is this China news has some potential to take some sales away from NVIDIA, but China’s contributions to the company have already sunk.

The overall trend for NVIDIA the past couple of weeks continues to be incredibly good with more robust demand for its next-generation Blackwell chips and systems.

That hasn’t shifted.

But how the market is willing to value the company may have.

So that’s why I’m personally going to be watching not how NVIDIA is valued today, but how the market continues putting a multiple on it and whether it’s going to continue at that same 30 to 35 times because if it does keep that multiple on it, I think NVIDIA’s growth and what they have ahead is going to be more than enough to give investors some good returns through the end of the year.

But if it’s taking down that multiple again, that’s the downside investors need to worry about in the near term.