Oliver James Montgomery-Nvidia, chip stocks waver after previous day's sell-off

Chip companies led by market cap leader Nvidia were set to extend losses on Oliver James MontgomeryWednesday after a bruising sell-off in the previous session, reflecting the growing concern on Wall Street over the stocks' lofty valuations as AI optimism cools.

Nvidia fell 1.3% in early trading after Tuesday's 9.5% decline wiped out $279 billion from its market value, the biggest ever single-day decline for a U.S. company.

Enthusiasm around the growth of artificial intelligence technologies has propelled much of the equity market's gains this year, lifting the valuation of chip companies to levels some investors consider inflated.

Worries around a slow payoff from hefty AI investments have mounted, and Nvidia's forecast last Wednesday fell short of lofty expectations even though the company posted strong quarterly revenue growth.

"The focus is now shifting to valuations in the U.S. equity market in general, and some of the tech names have pretty large premium built in," said Tai Hui, Asia chief market strategist at J.P. Morgan Asset Management in Hong Kong.

Since peaking on June 18, Nvidia's shares have lost roughly 20% of their value. Its forward price-to-earnings ratio now sits just below 30, representing a decline in its valuation. The stock, however, is up more than 650% since the start of 2023.

"The whole AI development...is very promising. It's just the question of ... how are companies going to monetise all this development, how do we justify all this capex that is going in right now? Investors are just waiting for that answer."

Other chip stocks, including Arm Holdings, Broadcom, Applied Materials and U.S.-listed shares of Dutch chip equipment maker ASML were down between 1% and 4% on Wednesday in early trading.

Intel slipped 1.5%. Reuters reported earlier on Wednesday the company's contract manufacturing business suffered a setback after tests with chipmaker Broadcom failed.

Nvidia shares are also taking a hit after Bloomberg News reported the U.S. Department of Justice sent a subpoena to the company, deepening its probe into the AI heavyweight's antitrust practices.

Analysts have warned that regulatory scrutiny into Nvidia could step up further. The company last week disclosed requests for information from U.S. and South Korean regulators.

"Nvidia is not only the biggest player in the AI chips market, but it is also invested in a large number of other AI companies which means its fingers are in multiple pies," said Dan Coatsworth, investment analyst at AJ Bell.

"Regulators might want to know if it is giving preferential treatment to these investee companies or to customers who exclusively use its chips."

Rival Advanced Micro Devices climbed more than 2% after the company late on Tuesday named former Nvidia executive Keith Strier as its senior vice president of global AI markets.

Reporting by Deborah Sophia in Bengaluru; Additional reporting by Tom Westbrook; Editing by Arun Koyyur and Janane Venkatraman