Nvidia Stock Enters Bear Market: 4 Reasons Behind the Drop

Nvidia stock entered bear-market territory after falling 20% from its record high. The decline came despite strong financial performance and falling valuation multiples.

Competition across artificial intelligence chips also intensified this year. Meanwhile, questions around data center spending added pressure as investors reassessed returns from heavy infrastructure investment.

Nvidia Stock Falls as Competition Rises

One reason for the NVDA stock decline was rising competition across artificial intelligence hardware. SambaNova raised $1 billion at an $11 billion post-money valuation on July 8.

The company develops custom chips, hardware systems, and cloud services for artificial intelligence inference. Etched has also attracted investor attention with chips designed around transformer workloads.

More pressure could come from Nvidia’s largest customers. OpenAI and Broadcom have worked on custom artificial intelligence processors, widening alternatives to general-purpose accelerators.

Microsoft, Amazon, and Google are also expanding proprietary chip programs. These efforts do not imply an immediate replacement of Nvidia hardware.

However, custom silicon could gradually reduce dependence on third-party accelerators. That shift may pressure Nvidia’s pricing power across selected workloads over time.

Nvidia still holds a strong position across artificial intelligence infrastructure. Its hardware ecosystem and software platform remain major barriers for smaller competitors.

Top Portfolio Companies are Struggling

Meanwhile, there are signs that some of the top companies that Nvidia invested in have started to struggle. One of these is OpenAI, which it invested over $30 billion a few months ago. A recent report showed that its market share fell below 50% for the first time ever. Anthropic has emerged as one of the fastest-growing companies in the industry.

There are also rumors that the company will postpone its IPO, which would have allowed Nvidia to realize its investments. Sam Altman aims to delay the IPO so that he can boost the valuation to $1 trillion.

Other companies it invested in are not doing well. Shares of neocoloud providers like CoreWeave, Nebius, and IREN have dropped by over 50% from the highest levels this year. Others like Marvell, Lumentum, and Intel have also dropped.

Rotation From Semiconductor Companies to Hyperscalers

Nvidia shares have also dropped because of the ongoing sector rotation. In the first place, this rotation was from semiconductor companies to those making memory products like Sandisk, Micron, and Western Digital.

Now, Morgan Stanley’s Mike Wilson predicted that there will be a rotation from semiconductor companies like Nvidia to hyperscalers like Amazon, Meta Platforms, Google, and Microsoft. Indeed, some of these hyperscalers have bounced back in the past few weeks.

Signs of Cooling Data Center Buildup

Meanwhile, there are signs that the data center business is cooling. One of these signs is that the number of data center cancellations in the US has continued rising. Some US states have started coming up with regulations targeting the industry. Also, analysts believe that data centers will be a key election issue in the upcoming midterm elections.

Another sign is the recent report that Meta Platforms is considering selling extra computing power. That could be a sign that the company over-invested, which could be a sign that it will slow its spending. Other hyperscalers may do the same now that their shares have dropped because of their robust spending.

Nvidia Stock Technicals Suggest a Rebound is Possible

Still, on the positive side, there are signs that the stock will rebound in the near future. It has slowly formed a falling wedge pattern, a common bullish reversal sign in technical analysis. The upper side of this pattern connects the highest swings since June 2nd. Also, the lower side of the wedge links the lowest lines since May 26.

The stock has also settled above the 200-day moving average. Therefore, the stock will likely rebound, potentially to the all-time high of $235, its highest level this year. On the other hand, a retreat below the support of $180 will invalidate the bullish outlook