On the eve of the heavyweight earnings report, NVIDIA plummeted during trading hours, abruptly halting its upward momentum.

On the eve of the heavyweight earnings report, NVIDIA's strong uptrend this year suddenly came to a halt. NVIDIA, a leader in the field of artificial intelligence, experienced a sharp drop due to one core reason - being too expensive.

On Tuesday, Eastern Time, NVIDIA's stock price opened lower, with an intraday decline of up to 6.7%, touching the $677 mark, and closing down 4.35% at $694.52, with a market value of $1.72 trillion.

Despite the sharp drop on Tuesday, NVIDIA's stock price has surged by about 40% so far this year. In the past few days, its market value even surpassed giants like Amazon and Alphabet-C, becoming the third largest market cap company in the United States, only behind Microsoft and Apple.

There was no significant negative news about NVIDIA on Tuesday. Media reports indicated that the drop in its stock price was mainly due to investors' concerns about whether NVIDIA's quarterly performance could justify its high valuation. Some traders decided to lock in profits before the earnings report:

• An industry insider commented, "Today we witnessed a significant adjustment in the AI sector. Although the AI theme is still there, this adjustment was long overdue, undoubtedly a defensive move."
• It was also pointed out that besides the performance report, investors are particularly interested in how CEO Jensen Huang views the demand development for NVIDIA in the remaining time of this year. "Any signs indicating a slowdown in the prosperity of AI could lead to a significant drop in NVIDIA's stock price and a reversal in its trend. Therefore, traders are understandably nervous before the earnings report."
• Dan Ives, a well-known analyst at Wedbush, stated that although 2023 marks the beginning of the largest technological revolution since the birth of the Internet in the 1990s, investors need to see continuous increase in corporate spending and demonstrate the growth path for 2024 and beyond to justify the high valuation.

NVIDIA is set to announce its quarterly earnings after the U.S. stock market closes on February 21. NVIDIA has already significantly exceeded expectations in its financial performance for several consecutive quarters. The market currently generally expects that NVIDIA's revenue will be boosted by the surge in demand for data center business, and its AI-related business will remain strong, especially with Meta, Tesla, and other major players heavily purchasing GPUs.

Analysts at Morgan Stanley predict that NVIDIA's Q4 earnings report will continue to show a strong profit level, likely exceeding market expectations once again. Benefiting from the emergence of B100 and a clear business layout, revenue guidance is expected to remain optimistic.

Although NVIDIA's stock price soared to a historic high this month, driving the entire U.S. stock market up, its forward P/E ratio has only returned to the level before the last earnings report released in November last year. NVIDIA's valuation is becoming more reasonable due to its profits, which is also why some in the market believe NVIDIA can still rise.

However, amidst the optimistic outlook for NVIDIA's earnings mentioned above, doubts in the market continue to emerge:

• Frank Lee, the technology research director at HSBC, said, "The market may be a bit hesitant about whether NVIDIA can provide strong enough guidance to revive the market and push the stock price to higher levels."
• Some traders mentioned, "If NVIDIA only meets or slightly exceeds expectations, it will be difficult for the stock price to rise. NVIDIA needs to significantly exceed expectations for the stock price to go up."
• A fund management company pointed out that although people are betting on NVIDIA to announce reliable earnings and performance forecasts, one thing to remember is that NVIDIA does not always respond well to outstanding performance. Sometimes the market's expectations are too high, leading to a stock price reaction that sells the facts.
• There are even more pessimistic views that believe NVIDIA's earnings report, whether good or bad, will end the bullish trend in the U.S. stock market. The reason is that any company with a significant skewness in bullish options may face greater selling pressure. Currently, bullish options are heavily betting on NVIDIA and other AI stocks. Once NVIDIA announces its earnings report, the implied volatility of the entire options market may decrease, causing the prices of bullish options related to NVIDIA stocks to fall, leading to a pullback in the U.S. stock market.

According to data from the options analysis company ORATS, based on the pricing of the options market, NVIDIA's volatility after the earnings report is expected to be between +11% and -11%. If such a magnitude of volatility occurs, it means that NVIDIA's market value will fluctuate by about $180 billion, making it one of the largest single-day market value fluctuations in U.S. stock market history.

On Tuesday, the bearish news for NVIDIA was that the media reported that Microsoft quietly started reducing its reliance on NVIDIA by developing alternative network cards. The network card developed by Microsoft is similar to NVIDIA's ConnectX-7, and the development may take more than a year. If successful, it could save Microsoft money and potentially reduce the time it takes for OpenAI to train large AI models on Microsoft servers. It should be noted that during NVIDIA's previous surge, such news did not hinder the upward momentum of the stock price.

NVIDIA's decline on Tuesday led to a drop in several chip stocks and AI concept stocks:

• Chip stocks have fallen for three consecutive days, underperforming the market on Tuesday. The Philadelphia Semiconductor Index and the Semiconductor Industry ETF SOXX both dropped over 2% in early trading, with midday losses exceeding 3%, closing down nearly 1.6% and 1.7% respectively. Arm initially fell by 10% and closed down by 5.1%. AMD fell by 6.8% during trading and closed down by 4.7%.
• AI concept stocks continued to plummet significantly, underperforming the market for several days. Super Micro Computer (SMCI), which fell 20% after hitting a new intraday high last Friday, dropped by 13.8% at midday and closed down nearly 2%. C3.ai (AI) fell by over 8% during trading and closed down by 5.9%. Adobe (ADBE) fell by over 3% in early trading and closed down by nearly 0.9%. SoundHound.ai (SOUN) initially dropped by over 4% but reversed to rise, closing up by over 4% against the trend.