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Why Nvidia Stock Popped, Then Dropped, Today

What happened

The tech-heavy Nasdaq took off like a rocket this morning, and took semiconductor stock Nvidia (NASDAQ:NVDA) along for the ride. Just after noon ET, however, the rally started to sputter, and by the time trading for the day was done, not only had the Nasdaq given up all its gains, but Nvidia stock closed down 3.7% for the day.

So what

So what went wrong? In the case of the Nasdaq as a whole, I fear that investors may have jumped the gun, presuming that after the Nasdaq met the definition for a stock market correction (down 10% from its high), the light would turn green for tech stocks to resume marching higher again.

No such luck.

Chalkboard drawing of stock chart arrow going up being erased and pointing back down.

Image source: Getty Images.

Nvidia in particular, meanwhile, had some bad semiconductor-specific news to contend with today. As reported this morning, investment banker Piper Sandler downgraded shares of Nvidia rival Advanced Micro Devices (NASDAQ:AMD) to neutral.

In its note, Piper warned that supply of and demand for computer chips in the automotive sector may reach parity in the second half of this year. Although this is a generalized problem for many semiconductor companies, it would also dent pricing power in this growing part of Nvidia’s business. Additionally, Piper warned that PC sales seem to be slowing in 2022, which could further dent earnings, and decrease investor enthusiasm for “high-multiple, high-growth technology stocks.”

Now what

“High-multiple, high-growth technology stocks.” Does that sound like anyone we know?

I mean sure, on the face of it this was a note about AMD, and at a P/E ratio of more than 42, AMD stock certainly meets the definition of a high-multiple tech stock (with high expected growth to match — analysts are forecasting 40% compound annual earnings growth over the next five years). It seems to me, though, that Nvidia is in an even more precarious position, what with its P/E being more than twice AMD’s, and predicated on similarly aggressive growth expectations.

Long story short, unless and until investors shake off their fear of investing in expensive stocks, Nvidia shares could remain at risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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