Nvidia Stock Slumps Ahead of Earnings: AI Trade Faces Uncertainty

Nvidia's stock price has taken a significant tumble ahead of its earnings report, reflecting broader concerns about the AI trade and increased competition from Chinese AI models. The chipmaker's shares plunged nearly 12% in the pre-market trading session today, potentially erasing around $400 billion from its market cap. This decline comes amid a broader tech market rout, with most AI stocks trading in the red.

The recent sell-off in Nvidia's stock can be attributed to several factors, including:

1. Growing competition from Chinese AI startup DeepSeek: The emergence of DeepSeek, a Chinese AI startup, has raised questions about the sustainability of high AI-related spending, particularly on Nvidia's graphics processing units (GPUs). DeepSeek's model, developed at a fraction of the cost required by US-based firms like OpenAI, has outperformed OpenAI's latest version in third-party tests. This low-cost breakthrough has pressured AI chipmakers like Nvidia, leading to a significant drop in its stock price.
2. Investor skepticism about AI stocks' valuations: As the US economy begins to show signs of stress, investors have grown skeptical of Nvidia and other AI stocks' sky-high valuations. The potential weakness in the economy could make companies think twice before investing in the promising but still risky and unproven technology, leading to a broader tech market rout.
3. Potential legal problems: The US Justice Department's reported investigation into Nvidia over potential antitrust violations has also contributed to the stock's decline. Although Nvidia has not received a subpoena, the mere possibility of an investigation has raised concerns among investors.
4. Broader tech market rout: The recent selloff in the tech market has also impacted Nvidia's stock price. The Nasdaq Composite fell 3.1% on Monday, its worst day since December, with Nvidia's stock dropping 17% to close at $118.58.

These factors align with the broader AI trade dynamics, as the emergence of affordable alternatives like DeepSeek could diminish the relevance of major US AI initiatives, such as Donald Trump's Stargate AI project. Additionally, the growing importance of affordability in AI innovation may lead to increased pressure on traditional AI chipmakers to lower costs or innovate further, further impacting the Nvidia stock price.

As Nvidia prepares to report its earnings, investors will be closely watching key metrics such as revenue growth, gross margin, operating expenses, and guidance for fiscal 2026. The company's customer concentration, particularly the top four hyperscalers that account for 80% of Blackwell chip sales, will also be under scrutiny. Investors should pay attention to any changes in these metrics, as they could indicate a slowdown in AI spending or increased competition from affordable alternatives.

In conclusion, Nvidia's stock slump ahead of its earnings report reflects broader concerns about the AI trade and increased competition from Chinese AI models. Investors should closely monitor the company's earnings and key metrics to assess the potential impact on its long-term growth prospects.