Another day of weak economic data hit the stock again.
After tumbling yesterday, shares of Nvidia (NVDA -3.10%) were heading south again today. Once again, weak economic data was the culprit, triggering another broad market sell-off.
This morning, the Bureau of Labr Statistics reported that the unemployment rate jumped from 4.1% to 4.3% in July, and new jobs fell to just 114,000. The news has sparked fears that the economy could be headed for a recession and that the Federal Reserve should have lowered interest rates at its meeting on Wednesday.
Nvidia was down as much as 7.2% this morning, though the stock recouped some of those losses and was down 4% in afternoon trading on Friday, slightly worse than the Nasdaq Composite, which fell 3%.
Image source: Nvidia.
Why Nvidia is getting hammered
Nvidia has led the market rally for the last year and a half as the champion of the AI boom. Its hardware has become essential to run the data centers that provide computing power for AI models like ChatGPT and the rush of other AI tools coming on the market.
The company’s own business continues to grow at a breakneck pace, but investors are starting to question valuations in AI stocks, including Nvidia’s, which had added more than $3 trillion in market value in little more than a year at one point. A gain of that size is unprecedented.
Now, in addition to concerns about Nvidia’s valuation, investors seem to have doubts about the strength of the economy, and rising unemployment could trigger a recession.
An economic downturn would likely hit the AI stock sector hard since Nvidia and its peers still trade at pricey valuations, and semiconductors are a cyclical industry. If customers slam on the brakes, the industry is going to be in trouble.
How low could Nvidia go?
It’s impossible to predict short-term movements for individual stocks or even the stock market as a whole, and Nvidia has been highly volatile lately. After falling 7% on Tuesday, the stock surged 13% on Wednesday in sympathy with strong results from rival AMD. In other words, the stock can turn on a dime if the news changes.
Investors should expect the volatility to continue, and the stock could fall significantly further, though that will depend on economic data and the company’s earnings report at the end of the month.
Nvidia’s momentum as a business won’t be undone easily. Tech titans like Elon Musk and Mark Zuckerberg have banged the drum on AI again this earnings season, saying it’s essential to stay ahead of the AI curve, and that getting left behind is a greater risk.
Nvidia likely has several more quarters of strong growth in front of it, but a recession could upset that. At this point, keeping some cash available to take advantage of ongoing dips on the stock seems like a good strategy. While the economy could falter, Nvidia’s leadership in AI hardware looks unshakable.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
