Chip stocks like Nvidia shake out after previous day's plunge

Shares of Nvidia recovered earlier losses to move higher on Wednesday, bolstering the chip company's stock after heavy selling in the previous session, signaling that Wall Street's optimism about artificial intelligence persists despite market concerns about high valuations for the stock. Leading AI stock Nvidia (Nvidia) rose 1 percent after opening in the red and dipping about 3 percent pre-market. Prior to that, Nvidia fell 9.5% on Tuesday, shrinking its market capitalization by $279 billion, the biggest one-day drop for a U.S. company.

By the close of the last trading session, the collective market valuation of the seven biggest beneficiaries of the AI boom, including Nvidia, Advanced Micro Devices and Broadcom, had fallen to $3.99 trillion from $5.06 trillion in mid-June. Enthusiasm for the development of AI technology has fueled much of the stock market's gains this year, sending chip company valuations to what some investors consider inflated levels. Concerns about slow returns on huge investments in AI are growing, and Nvidia's earnings forecast released last Wednesday fell short of the market's high expectations, even though the company reported strong quarterly revenue growth.

The focus has now shifted to overall valuations in the U.S. stock market, where premiums for some tech stocks are already quite high. Since peaking on June 18, Nvidia's shares have fallen about 20 percent. Its forward price-to-earnings ratio is now slightly below 30, suggesting a decline in valuation. However, since the beginning of 2023, the stock has gained more than 650%. The whole artificial intelligence development is very promising. The question is just how companies are going to monetize all of these developments, and other chip stocks, including Micron Technology, Broadcom and Qualcomm, were up between 1% and 2.3% on Wednesday.