Nvidia Stock Drops 21% Amid Trade Wars, Competition

Nvidia's stock price has declined by 21% from its peak, raising questions about whether it is a good time to buy. The decline is attributed to increased competition from DeepSeek and the impact of trade wars, which have cast a shadow over the company's upcoming financial report scheduled for May 28. The company's revenue from China is expected to decrease by $150 billion to $200 billion due to tariffs, according to a report by Vivek Arya of the American Bank Securities.

Nvidia has informed major clients in China, including ByteDance, Alibaba, and Tencent, that it is redesigning its AI chip architecture to comply with the latest U.S. export restrictions. This move is expected to result in a $55 billion loss in the first quarter. The company has also announced plans to release a downgraded version of its H20 AI chip for the China market within the next two months, following the ban on the original model due to U.S. export restrictions. The new version will have reduced memory capacity and other performance limitations, allowing customers to adjust module configurations to control performance.

Despite these challenges, Nvidia and its peers in the Magnificent Seven (Mag 7) group continue to hold a dominant position in the market. The Mag 7 companies, which include Nvidia, account for 28.4% of the market capitalization of the S&P 500 index, 22.6% of expected revenue, and 11.8% of expected earnings. However, the narrowing gap between the earnings of Mag 7 companies and the S&P 500 index raises questions about the justification for investing in these expensive stocks.

The Federal Reserve's decision to keep interest rates unchanged at 4.25%-4.50% during its May policy meeting, citing uncertainty due to trade policies and negative GDP growth in the first quarter, adds to the market's uncertainty. While Nvidia's price-to-earnings ratio has compressed significantly this year, the company and its Mag 7 peers remain expensive. The narrowing earnings gap between Mag 7 companies and the S&P 500 index, along with the declining return on investment for Mag 7 stocks, makes it difficult to justify purchasing these high-priced stocks, despite their high PEG ratios and other positive factors.