Safe to say, it’s been a brutal week for chip stocks.
On Oct. 30 alone, the iShares Semiconductor ETF (SOXX) plunged 8.2%, wiping out an estimated $1 trillion in chip stock market value during the session.
Perhaps the biggest headline-maker was Intel (INTC), which suffered its worst one-day stock decline in half a century following its earnings report, as covered by CNBC.
And the company that has come to symbolize the AI boom, Nvidia (NVDA), isn’t offering much comfort.
That said, Melius Research analyst Ben Reitzes, rated five stars by TipRanks, revamped his Nvidia stock price target just days after Intel plunged nearly 29%, as reported by TheFly.
Reitzes still recommends buying Nvidia, even as its shares trade roughly 15% below their October high. So why would an analyst remain bullish while slashing his price target so dramatically?
The answer points to a financial risk that extends well beyond Nvidia’s powerful AI chips.
Intel’s historic crash sends a warning across the chip sector
Intel gave chip investors an expensive reminder on Oct. 30, with its stock tanking 29% following the company’s earnings report.
Interestingly, on paper, its Q3 showing looked solid. Revenue rose 21% to $16.5 billion, and its data-center and AI segment grew 78%. But management forecast just $15 billion to $16 billion in Q4 sales, missing Wall Street’s expectations by over $1 billion.
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The trouble ran deeper than guidance.
Higher memory prices continue to squeeze PC demand, while shortages of critical components have prevented Intel from meeting some server-chip orders. Expanding manufacturing capacity is costly, and the company warned it doesn’t foresee positive cash flow this year.
CEO Lip-Bu Tan tried to reassure investors. “Despite near-term headwinds across the PC industry, demand for our CPUs remains robust,” he said.
Wall Street wasn’t convinced, though. Intel’s Oct. 30 rout coincided with a 10.9% slide in AMD, a 4.2% drop in Nvidia, and an 8.2% fall in the iShares Semiconductor ETF.
Intel and Nvidia face different business challenges. But the sell-off revealed a common market worry.
Relentless demand is no longer enough if investors question execution, future profits, or the cost of delivering growth.
Also read: How much Nvidia stock does CEO Jensen Huang actually own?
Five-star analyst cuts Nvidia target by $105 but keeps Buy rating
A $105 price target cut typically signals a sell. Melius Research’s Ben Reitzes made the move on Nov. 2, but kept telling investors to buy Nvidia stock.
Reitzes lowered his target to $315 from $420, a 25% reduction. Against Nvidia’s Nov. 3 close of $206.69, that still points to a sizable 52.4% upside.
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The 5-star analyst has become skeptical about how Nvidia’s customers will pay for the infrastructure they keep ordering. Melius warned that at least five companies valued above $1 trillion may need to issue hundreds of billions of dollars in securities to finance their expansion.
“The amount of paper is so large it has become the primary risk,” the firm wrote.
More bonds and shares underscore stronger competition for investors’ money. Borrowing could become costlier, and shareholders could be much less willing to pay a premium for future chip earnings, even if revenue continues to climb.
Interestingly, a profitable company could also deliver strong results while still commanding a lower stock price relative to those profits. Moreover, Melius expects financing guarantees and other backstops to be part of the infrastructure buildout through 2028, suggesting this pressure might not disappear quickly.
To back up those concerns, Goldman Sachs estimated nearly $500 billion in AI-related debt issuance by early August. Nvidia-backed cloud provider CoreWeave had also accumulated roughly $50 billion in debt while expanding its data-center business, as reported by Reuters.
That said, it’s important to note that Nvidia wasn’t exactly singled out. Melius also cut targets for AMD, Broadcom, Marvell, Dell, Qualcomm, and CoreWeave.
Related: History of Nvidia: Company timeline and facts
Nvidia’s booming earnings face a new Wall Street test
Nvidia’s business and stock price continue to tell different stories. Revenue surged 106%, yet its stock finished Nov. 3 about 15% below its October high.
CEO Jensen Huang sees no shortage of demand. “Now, compute is revenue,” he said in August, adding that demand was accelerating.
One exchange is revealing. On Nvidia’s August earnings call, Reitzes asked whether advances in self-improving AI would cause demand to accelerate further.
“It’s going to inflect further,” Huang replied.
Yet Reitzes has since slashed his price target. His revised $315 sits near Wall Street’s roughly $327 consensus, but below Bernstein’s $400 and Evercore’s $465.
Nonetheless, Nvidia’s Nov. 17 earnings report will test that tension. Management forecast $108 billion in quarterly revenue, but margins, orders, and customers’ financing capacity will matter.
Nvidia has demonstrated it can continue selling chips at a brisk pace, but the question is whether its buyers can keep financing the boom.
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