Nvidia’s Shaky Q2 Underlines the Stock as Generative AI’s Sentiment Litmus Test

Heavy is the head that wears the crown during a Wall Street bull run, and Nvidia’s status as the king of the ongoing generative AI boom means that the stock can be especially vulnerable to the prospect of weakening investor appetite.

Nvidia (NASDAQ:NVDA) became Wall Street’s most exciting story in 2023. The chipmaker rallied some 239% throughout the year, smashing through the $1 trillion market capitalization glass ceiling before peaking at a cap in excess of $2tn.

The optimism, fuelled by the ongoing generative AI market rally, continued to make waves in the first-quarter of 2024. NVDA rallied almost 90% in the opening three months of the year to continue its strong spell of dominance.

But finally, at the beginning of April, the stock took its biggest tumble in four years. The wider implications of the Nvidia sell-off are likely to shake up the entire generative AI market.

Counting the Cost of NVDA Sell-Offs

The first three weeks of April 2024 saw NVDA shed more than 15% of its value amid widespread investor sell-offs.

Although greater degrees of volatility can be expected for stocks caught up in the hype phase of an emerging market, Nvidia’s April downturn has been the company’s biggest dip since the initial outbreak of the Covid-19 pandemic in March 2020.

For Nvidia, the pandemic era must seem like a lifetime ago. Its March 2020 sell-offs saw the stock tumble to $51.44. The stock’s peak closing price in March 2024 was $950.02.

But after four years of meteoric growth, Nvidia’s recent market downturn is particularly concerning–particularly now the stock’s gained the status as a tech pioneer that’s been driving the S&P 500 higher on a consistent basis.

Nvidia’s position at the pinnacle of the generative AI boom could mean that the stock would always be the first to absorb the impact of a change in investor sentiment, and the fears are that NVDA would be the canary in the mine should we suddenly discover that generative AI has been in a hype bubble that’s ready to burst for some time.

Although Nvidia’s recent difficulties have coincided with the news that US inflation rates have continued to defy expectations, placing the prospect of interest rate cuts on hold for the foreseeable future, analysts suggest that fears over a cooling generative AI boom remain the key cause of investor concern in the wake of the underperformance.

“The stock pullback has very little to do with rates,” explained Parag Thatte, strategist at Deutsche Bank, in a recent Financial Times interview. “It’s more to do with investors pricing in slower earnings growth.”

There’s also a growing concern that generative AI has begun to transform from its hype phase towards the question of implementation.

While Large Language Models (LLMs) like ChatGPT have been excellent tools in showcasing the sheer power and potential of generative AI, they’ve also been largely error-prone in a manner that could cause more hesitancy among enterprises seeking to embrace the technology.

It’s for this reason that Gil Luria, analyst at DA Davidson, warned that a 20% slide in Nvidia stock could take place by the end of 2024. Luria suggests that the implementation phase of Nvidia’s products, which are currently being bought en masse by the likes of Microsoft and Amazon, could run into trouble when key buyers reach capacity and demand begins to fall.

However, other analysts suggest that the end of the generative AI hype phase will be met by a more strategic implementation phase which could keep the industry growing.

“Concerns about GenAI failing to meet expectations in 2024 should be seen in the context of the natural cycle of hype and maturity of new technologies,” said Maxim Manturov, head of investment research at Freedom Finance Europe. “While some industry leaders have expressed frustration with the speed of progress in artificial intelligence and GenAI in their organisations, others remain optimistic about its potential.”

“Companies heavily invested in GenAI are under pressure to prove profitability, and industry reports indicate a shift to more strategic AI initiatives in the coming years,” Manturov added.

Is the Generative AI an Exceptional Case?

Here, it’s worth reminding ourselves that we’re talking about the generative AI boom. This is an industry that Bloomberg Intelligence last year suggested would grow at a CAGR of 42% into a $1.3 trillion industry by 2032.

Fresh demand for generative AI products was predicted to add around $280 million in new software revenue. Could we be talking about an emerging technology that’s market impact is without precedent?

Morgan Stanley analysts have underlined the indecisive outlook for Nvidia and the wider generative AI market in Q2 2024 by proposing a more bullish outlook for NVDA as well as the generative AI-focused Amazon (AMZN).

As Nvidia reported Q4 2023 revenue increases of 265% to $22 billion, CEO Jensen Huang claimed that "accelerated computing and generative AI have hit the tipping point," before adding that "demand is surging worldwide across companies, industries and nations."

The company’s innovations in recent weeks have included the text-to-3D tool, LATTE3D, which Nvidia described as a ‘virtual 3D printer’, as well as a collaboration with Hipocratic AI to develop a network of generative AI nurses that could cost $9 an hour.

Nvidia’s quick 5% rebound following its record sell-offs should serve as a wider vote of confidence in the innovation that the company is capable of. Regardless of whether its success has made it the GenAI canary, NVDA is certainly an innovative stock that’s capable of sustaining its impressive growth.

Bubble or Boom?

Ultimately, Nvidia’s performance over the past 12 months means that the stock has become a live litmus test for investor sentiment in generative AI. Whether that’s a good thing or not depends wholly on the capabilities of the industry itself.

Nvidia’s rapid growth has seen the stock rub shoulders with the likes of Microsoft, Apple, and Alphabet, and the company will be keen to follow the lead of other industry giants to continue sustaining its growth through innovation.

As a semiconductor leader, the possibilities are nearly endless for Nvidia. As long as the capabilities of generative AI continue to astound clients and deliver on its promises, NVDA remains a stock that can continue to grow. If investors get a whiff of saturation or inefficiency, the Nvidia litmus test could face some further challenges ahead.