from Nvidia (NVDA) Wednesday’s « relief rally » was short-lived. The stock hit its lowest level since May, falling as much as 7% on Friday and erasing gains from earlier in the week amid a broader rout in the technology sector.
The Nasdaq (^IXIQUE) has entered correction territory, driven not only by signs of an economic slowdown but also by fears that a handful of the biggest tech players are spending too much money on AI.
But that last factor – the commitment to invest more in AI – should be seen as a “catalyst” for Nvidia and other AI chipmakers.
Wall Street pros were quick to tell Yahoo Finance this week that the AI market is far from over and that the recent pullback should be viewed as an opportunity to scoop up stocks. While big tech companies have struggled to show the fruits of their labor in AI, they remain committed to investing in chips for the long term.
“This is a good buying opportunity given the outlook for the broader market,” Luke Stone of Winthrop Capital Management told me after Nvidia rival AMD (AMD) strong revenue forecasts.
« We see a disconnect between chipmakers and their customers, who have to invest more and more in the product and are really struggling, » Winthrop added.
During the last quarter, Meta (META), Alphabet (GOOG, GOOGLE) and Microsoft (MSFT) has recorded more than $40 billion in spending. Amazon (AMZN) spent $30 billion in the first six months of the year and plans to spend even more in the second half. All said the majority of that money was going to AI.
That’s not what the market wanted to hear. Shares of Amazon and Microsoft closed the week lower, mirroring Alphabet’s plunge last week, as investors made it clear that the AI business has turned into a story to watch.
But what’s worrying for hyperscalers is good news for Nvidia and its peers.
“We’ve continued to see capital spending increase significantly and that’s really what’s important,” Stacy Rasgon, Bernstein’s managing director, told me.. « People worry about sustainability, but it looks like this spending, at least for now, is sustainable. »
And that should boost Nvidia’s revenue, since Meta, Amazon, Google and Microsoft account for more than 40% of the chipmaker’s revenue.
“The fear that the revenue trajectory will not be the same over the next 12 months is starting to fade,” CFRA’s Angelo Zino told me. “We think Nvidia is going to deliver strong results, which is going to be a catalyst for the industry.”
In a note to clients earlier this week, Morgan Stanley’s Joseph Moore said the sale of Nvidia was a « good entry point » and downgraded the chipmaker to his « best pick. »
“We feel the market is seeing the glass half empty in some of the hyperscale commentary, while there is a clear desire from customers to continue to commit resources to developing multi-modal generative AI,” Moore wrote.
Dan Morgan, portfolio manager at Synovus Trust, compared the opportunity to invest in Nvidia and other AI infrastructure stocks to the vendors that thrived during the gold rush. “Would you rather be the guy mining gold or the guy selling the equipment to mine gold?” he said.
Nvidia ended the week down 5% and about 26% from its record closing high. Despite the pullback, shares are still up 116% year to date.
Seana Smith is a presenter at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Advice on transactions, mergers, activism situations or anything else? Email seanasmith@yahooinc.com.
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