Market tremors shake Nvidia

Despite the sell-off, Piper Sandler analysts pointed to a "tremendous opportunity" to buy chip stocks, noting Nvidia's strong position in the AI accelerator space and the upcoming Blackwell chip expected to boost revenues into 2025. Piper Sandler maintains an Overweight rating with a $140 price target.

Nvidia's stock closed at $98.91, down 5.12%. Reports of delayed AI chips impacting major customers like Microsoft, Alphabet, and Meta were countered by Nvidia's statement that production remains on track for the second half of the year.

Piper Sandler also highlighted Advanced Micro Devices (AMD) as a "Top Pick," with AMD gaining server market share from Intel. AMD stock fell 1% on Wednesday.

Recent volatility in chip stocks has been driven by a downturn in Big Tech. The Philadelphia Semiconductor Index has dropped nearly 15% since July, prompting Piper Sandler to revisit its coverage.

In addition to Nvidia and AMD, ON Semiconductor (ON) is viewed as well-positioned. Nvidia shares fell over 6% on Monday amid a broader market decline, with the "Magnificent Seven" stocks losing more than $650 billion in market cap.

As anticipated, Nvidia's (NASDAQ: NVDA) impressive rally is beginning to lose momentum, with shares down about 21% over the last 30 days. Although Nvidia remains a strong company, its high valuation and lack of diversification could lead to further declines. Let’s examine how recession fears and AI fatigue might impact Nvidia over the next three years.

Economic challenges

Recession indicators are emerging, with the U.S. adding only 114,000 jobs in July, below the 175,000 expected, and the unemployment rate rising to 4.3%. The Federal Reserve may cut interest rates to stimulate growth, but it might not be enough to prevent a significant economic downturn. For Nvidia, a recession could be particularly damaging. Despite its leadership in AI GPUs, macroeconomic issues could undermine its business model.

Luxury products and cyclicality

Nvidia’s business is cyclical. During economic downturns, consumers are less likely to buy expensive new hardware, opting instead for cheaper or used options. While enterprise-level hardware offers some protection, similar spending cuts could occur in the AI chip market. Analysts like Goldman Sachs' Jim Covello have raised concerns about the high costs and limited returns of current AI investments, warning that overbuilding can end badly.

Under diversification

Nvidia’s first-quarter revenue surged 262% to $26 billion, mainly from data-center chip sales, which increased 427% to $22.6 billion. However, this growth means Nvidia is heavily reliant on a few key products, making it vulnerable if AI chip demand slows. Other segments, like gaming and professional visualization, now represent only a small portion of revenue.

Investment considerations

Nvidia stock has been an excellent investment, rising over 450% in the last three years. However, with a forward P/E multiple of 42, its valuation might be too high, especially if the economy slows and enterprise clients cut back on AI chip purchases. Nvidia could face significant corrections in the coming years due to its overexposure to the AI industry.

Before investing in Nvidia, consider that other stocks might offer better returns. The Motley Fool Stock Advisor team recently identified ten stocks they believe are more promising investments right now, and Nvidia was not on that list.