As we write AI (artificial intelligence) chip champion Nvidia (NVDA:NASDAQ) has fallen more than 16% since reporting second quarter numbers. That’s the equivalent of losing an entire Procter & Gamble (PG:NYSE) or two AstraZeneca’s (AZN), the UK’s largest listed company.

To lose one AstraZeneca might be considered unfortunate, losing two is downright incompetence.

Quips aside, more than $400 billion of market cap has vanished in eight days (at $105) since it reported another record quarter (overnight 28 Aug). Those Q2 figures showed year-on-year revenue and earnings growth of 122% and 168% respectively. Data centre revenue, where most of its AI income is focused, increased 154% year-on-year.

‘Overall, the company continues to deliver amid high expectations, and it seems clear that data centre sequential growth is still well in the cards into year-end’, said Citi analysts.

Bernstein’s team believes that ‘several’ billion dollars of incremental Blackwell revenue into Q4 ‘should drive solid further sequential growth, and it feels to us that Hopper could easily continue to show sequential strength as well which might further accelerate things’.

Blackwell and Hopper are Nvidia’s next two generations of GPU (graphics processing units) earmarked for AI’s next development phase.

In truth, Nvidia’s share price is being impacted by more than company specifics, with a recent change of tone by Federal Reserve chief Jay Powell from taming inflation to propping up a weakening US economy requiring new balancing act skills.

Cutting interest rates too quickly (there’s been talk of a 0.5% cut at the upcoming meeting on 18 September) could send a message that the economy is slowing too fast and needs more desperate measures, although consensus still sees a 0.25% cut as most likely. Complicating matters, a bigger cut also runs the risk of being interpreted as political, given the proximity of the US election in November.

Even so, for (currently) the world’s third largest company, and one of the most widely owned stocks, such a large market cap drop is a big deal. Even if you don’t own Nvidia shares directly, you’re almost certain to have exposure to the company through any number of index ETFs or active funds.

ANTITRUST PROBE

Where worries about maintaining this sort of electrifying growth amid production delays for Blackwell (now sorted out) dominated, Nvidia is now facing a fresh challenge, falling under the scrutiny of US Department of Justice regulators.

In June, the DoJ and the FTC (Federal Trade Commission) reached a deal to carry out antitrust investigations into Nvidia and fellow AI (artificial intelligence) industry leaders Microsoft (MSFT:NASDAQ) and OpenAI, the firm behind ChatGPT.

Antitrust officials are said to be worried by complaints over Nvidia making it difficult for customers to switch or shop around for AI chips from competitors, like Advanced Micro Devices (AMD:NASDAQ) for example. Investigators are also concerned by talk that Nvidia penalises buyers that don’t exclusively use its AI chips.

Investigators have reportedly also asked for evidence from other companies in the industry after initially sending questionnaires about Nvidia’s business practices.

‘We have inquired with the US Department of Justice and have not been subpoenaed,’ the company said in a statement. ‘Nonetheless, we are happy to answer any questions regulators may have about our business.’

Nvidia’s clarification that it has not been ‘subpoenaed’, as first reported, appears to be a minor quibble, but semantics aside, the company is naturally putting up a stern defence, arguing that its edge in the AI computing market is a consequence of the superiority of its products.

‘Nvidia wins on merit, as reflected in our benchmark results and value to customers, and customers can choose whatever solution is best for them,’ the company said in a statement.

This is supported by anecdotal evidence. For example, an article in the Financial Times (3 September) reported Huawei’s rival Ascend AI chips had faced significant customer criticism due to ‘bug ridden software’ and slower inter-chip connectivity.

IMPACT ON GROWTH

Nvidia’s rampant growth in recent years has been driven by its dominance in the AI chip market, where it is estimated to have an 80% market share. These GPUs have become essential for large language model training because of their superior scope for handling vast quantities of data.

In the five quarters since Q1 2024, Nvidia revenues have expanded from $7.19 billion to more than $30 billion. Annual revenues have soared since 2020’s $10.9 billion, hitting $60.9 billion last year (to 31 Jan 2024) and are seen tripling over the next two years.

NVIDIA - A SNAPSHOT

Nvidia’s premium processors were initially used for graphics-heavy computer games, striking key licensing deals to place its chips in Xboxes and PlayStations. But the ability of Nvidia’s GPUs, or graphics processing units, to accelerate the speed of data processing have helped to put it at the forefront of the AI revolution.

WHAT HAPPENS NOW?

If proven, the antitrust investigation could lead to regulatory challenges and potential legal action, which could negatively impact Nvidia’s market dominance, its ability to expand market share and future revenue and earnings growth.

But it’s a big if. Nvidia will put up a strong defence if the probe escalates, one that could pull in US Government restrictions on its ability to sell in some overseas markets, China in particular. If so, it could open a complex can of worms.

It’s also worth noting that antitrust challenges are par for the course in the technology industry, and they are typically brushed off by analysts and investors with most eventually settled by fines and/or modest remedies before being consigned to history.

It’s impossible to know how this one will play out but what we can say is that the probe into Nvidia adds an extra layer of uncertainty around the company right now, hence the discount the market has applied to the share price.

Bernstein recently raised its price target on Nvidia stock from $130 to $155, demonstrating its confidence in the long-run potential. The consensus target price is $148.50, implying 40% upside from current levels. 56 of the 60 analysts that cover Nvidia have the stock as a Buy (the other four are Holds), according to Koyfin data.

Koyfin also has the forward PE (price to earnings) multiple at 31.4, its lowest since a blip in April 2024, otherwise its lowest since January, while Stockopedia’s rolling 12-month PE is 30.2, on par with Apple (AAPL:NASDAQ) and Walmart (WMT:NYSE), neither of which is expected to put up growth numbers anywhere close to Nvidia’s.

There’s nothing wrong with investors trimming exposure to Nvidia, even after the recent weakness it is still up more than 100% year-to date, as part of a risk adjustment exercise. But often in times of uncertainty, doing nothing is your best bet, and that’s probably your best bet now.

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