Nvidia's stock has experienced a substantial decline in market value, shedding approximately $1 trillion in less than two months. This drop has brought its valuation back to levels seen before the artificial intelligence boom, making the stock the cheapest it has been since that period. Despite this, the company's graphics processing units (GPUs) continue to hold a dominant position in the artificial intelligence data center market.
The decline comes amidst concerns over rising interest rates, which are impacting the financing of AI infrastructure. A quarter-point Federal Reserve rate hike reportedly wiped $300 billion from Nvidia's $5.37 trillion market cap, highlighting its sensitivity to interest rate changes, especially for a stock trading at 45 times earnings with a thesis reliant on future cash flows. Hyperscalers like Microsoft are projected to spend nearly $800 billion in 2026 and $1.3 trillion in 2027 on capital expenditures, which become harder to justify with higher borrowing costs.
Investors are also expressing caution regarding Nvidia's customer financing practices. The company's accounts receivables have jumped by 64% over the past six months to $63 billion, indicating that customers are either taking longer to pay or more products are being provided on credit. This "circular finance" approach, where Nvidia offers financial assistance to help customers purchase more chips, raises concerns about potential risks if demand were to slow. Analysts from LSEG project Nvidia's pre-tax profit to reach $276.3 billion in 2027, $413 billion in 2028, and $593.4 billion in 2029.
Additionally, Nvidia faces challenges related to U.S. export controls, which restrict sales of its most powerful chips to China. The company's Q3 revenue guidance of $108 billion assumes zero data center chip sales to China, indicating a significant lost opportunity, though any policy shift could become upside. The competitive landscape is also evolving, with Advanced Micro Devices (AMD) crossing the $1 trillion valuation mark, presenting a second source for buyers, though Nvidia maintains a substantial scale advantage and ecosystem lock-in. Despite a strong Q2 FY2027 revenue of $96.22 billion, up 105.85% year-over-year, and non-GAAP EPS of $2.22, the stock's price-to-earnings (P/E) ratio has fallen from 34 times last September to 19 times, suggesting investors are paying less for each dollar of earnings, potentially signaling a "peak earnings trap" scenario.
