Nvidia's Chart Shows Bearish Signs as Huang Warns on AI Race: Should You Sell?

Overview of Nvidia's Recent Performance

Nvidia stock experienced a sharp decline on Thursday, continuing a two-day losing streak. This downturn is part of a broader sell-off in technology stocks, driven by concerns over valuations. Investors are also considering the cautious stance taken by Nvidia's CEO, Jensen Huang, regarding the U.S.-China race in artificial intelligence (AI) development.

Nvidia recently made history by becoming the first company to reach a $5 trillion market capitalization, although it fell slightly short this week. The question remains: is now a good time to buy or sell Nvidia stock?

Insights from Jensen Huang

In a recent interview with the Financial Times, Huang warned that China might gain an edge in the AI technology race. However, he later clarified his position on social media, stating that China is "nanoseconds behind America in AI." He emphasized the importance of the U.S. leading in AI and securing global developers.

This mixed messaging has added to the uncertainty surrounding Nvidia's future prospects.

Competitor Updates: AMD's Performance

Meanwhile, Nvidia's competitor, Advanced Micro Devices (AMD), delivered a beat-and-raise report. Third-quarter revenue from its PC and gaming segments grew by 73%, while data center sales increased by 22%. Although shares initially dropped due to the focus on PC and gaming chips, they rebounded on Wednesday following positive comments from AMD's CEO, Lisa Su.

Su highlighted the increasing demand for compute power, noting that breakthroughs in business, science, and society now depend on more powerful, efficient, and intelligent computing.

Analysts' Perspectives

Investors have expressed concerns about the valuation of AI-related stocks, but strong demand for AI technology has pushed companies like Nvidia to record highs this year.

Several analysts have raised their price targets for Nvidia. For instance, Loop Capital increased its target to $350 from $250, maintaining a buy rating. Rosenblatt Securities raised its target to $240 from $215, and Goldman Sachs increased its target to $240 from $210, all keeping a buy rating.

Magnificent Seven Companies and AI Spending

Last week, several members of the Magnificent Seven, including Amazon, Meta, Microsoft, and Alphabet, announced plans to increase their capital spending on AI technology. Amazon projected capex reaching $125 billion this year, with further growth expected in 2026. Microsoft surpassed its quarterly spending targets for AI infrastructure to meet growing demand.

Amazon's CEO, Andy Jassy, mentioned the deep relationship between Amazon and Nvidia, emphasizing that they "buy a lot of Nvidia."

International Developments

During a meeting in South Korea, President Donald Trump and Chinese President Xi Jinping did not address the export ban on advanced AI chips designed by Nvidia. However, Trump suggested that Beijing could negotiate directly with Nvidia, with the U.S. acting as an arbitrator.

Nvidia's CEO, Jensen Huang, previously stated that the company needs $50 billion in China chip sales to fund its research and development in the U.S.

Taiwan Semiconductor's Earnings Beat

Nvidia's stock received a boost after its chip manufacturer, Taiwan Semiconductor (TSM), exceeded analysts' expectations for its third quarter. TSM's midpoint sales guidance for the current quarter of $32.8 billion surpassed Wall Street's target of $31.55 billion.

AI Infrastructure Investments

Recent developments in the AI sector include BlackRock's $40 billion acquisition of Aligned Data Centers, with Nvidia and Microsoft among the founders of the Artificial Intelligence Infrastructure Partnership. This deal highlights the growing interest in AI infrastructure.

Nvidia's partnership with OpenAI involves deploying at least 10 gigawatts of AI data centers using Nvidia processors. Analysts at Oppenheimer have raised their sales estimates and price targets for Nvidia, citing strong potential for returns.

Regulatory and Market Concerns

Nvidia faced challenges in China, where the Cyberspace Administration ordered major tech companies to stop buying its AI chips. Additionally, the State Administration for Market Regulation is investigating whether Nvidia breached antitrust rules by acquiring Mellanox Technology in 2020.

Nvidia has stated that it has received approval for its planned acquisition of Mellanox Technology. However, the company reportedly ordered component makers of its China chip to halt production, following concerns about remote tracking or shutdown capabilities.

Financial Results and Outlook

In late August, Nvidia reported fiscal second-quarter earnings of $1.05 per share, exceeding the estimate of $1.01 per share. Sales of $46.74 billion also beat expectations. Notably, there were zero sales from its China H20 chip, which was not included in its fiscal third-quarter revenue outlook.

The company also announced a $60 billion stock buyback, signaling confidence in its long-term prospects.

Strategic Moves and Revenue Deals

In August, Nvidia secured a license to sell its H20 AI chips in China, in exchange for giving 15% of its revenue from chip sales in China to the U.S. government. This deal has drawn scrutiny from legal experts, who note that such arrangements may invite regulatory attention.

Investment Considerations

Nvidia's performance in terms of its 12-month price action has been impressive, outperforming 88% of other stocks in Investor's Business Daily's database. Funds own 41% of Nvidia's outstanding shares, indicating strong institutional support.

With an Earnings Per Share Rating of 99 and a Composite Rating of 99, Nvidia remains a top performer in the AI space.

Technical Analysis

From a technical perspective, Nvidia is currently in a buy zone that extends up to 193.70, above a flat base entry at 184.48. However, the stock undercut its 21-day moving average on Thursday, and the relative strength line has begun to decline, suggesting weaker performance compared to the S&P 500 index. This could signal a potential round-trip sell signal.

Conclusion

As investors weigh the factors influencing Nvidia's stock, the combination of strong financial results, strategic partnerships, and ongoing AI investments continues to make it a compelling choice. However, the market's sensitivity to valuation concerns and regulatory developments means that caution is warranted.