Nvidia (NVDA) shares extended their recent run of declines Wednesday, marking an 8.5% drop from the all-time high they reached last week. But the world's biggest AI-chip maker is starting to exhibit moves that could have even bigger implications for investors and the broader tech sector.
Nvidia shares have added more than $1 trillion in value this year, a staggering performance for a stock of that size, powered in part by its dominant position in perhaps the biggest investment surge since the birth of the internet.
Chief Executive Jensen Huang told investors in February that a wave of investment into artificial intelligence will "open up a whole new world of applications not possible today" while creating a market valued in the "hundreds of billions of dollars" every year.
"We started the AI journey with the hyperscale cloud providers and consumer internet companies," Huang said. "And now every industry is on board, from automotive to health care to financial services, to industrial to telecom, media and entertainment."
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Investors have been inclined to believe him: Since he co-founded the group in 1993, taking it public in 1999, Nvidia has grown from a niche-focused maker of videogame chips to the world's third largest tech giant with a market value of more than $2.2 trillion.
In fact, an ETF recently launched by Leverage Shares, which aims to deliver returns based on long positions in Nvidia at three times leverage, topped $100 million in assets this week.
Nvidia surge births big short bets
The parabolic surge in Nvidia shares began when the group stunned Wall Street with a revenue forecast that exceeded analysts' forecasts by as much as 75%.
But it is now starting to show cracks in its exterior.
Nvidia shares are the third-most-shorted stock on the market, according to recent data from S3 Partners, with some $18.3 billion in bets against it.
That compares with around $20.17 billion in short interest on Microsoft (MSFT) and $18.72 billion on Apple (AAPL) . Nvidia's short interest even exceeds that of Tesla (TSLA) , which is pegged at $17.01 billion, even though the electric-vehicle stock has fallen more than 30% so far this year.
Short-sellers bet against a company by borrowing shares and selling them. If the price of the stock declines, the short-sellers will buy back the shares at a lower price, return the borrowed stock (while paying a fee), and pocket the difference.
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That tactic hasn't proven profitable, of course, and short sellers were down nearly $7 billion in mark-to-market losses as of last month, but nonetheless they're still adding to bets on Nvidia's decline.
Nvidia volatility highest among Magnificent 7 peers
The renewed short interest could explain the second of the stock's most-troubling characteristics: its surging volatility.
Traders will often derive a figure from the options market, known as implied volatility, to gauge the chances of a particular stock having outsized moves over the coming month.
Nvidia's implied volatility, at 0.6392, is now more than double its level at the start of the year, according to data from AlphaQuery. The firm derives the figure from the pricing of the at-the-money call options, where the stock price and the option's strike price are identical.
Compare that to just a 7.75% increase in CBOE Group's VIX index, the market's go-to volatility gauge, which measures expectations of 30-day volatility across a wide range of S&P 500 options, and the stock's potential for big swings becomes even clearer.
Nvidia's implied volatility levels are also three times those of Microsoft and Apple, and more than 34% higher than the last peg placed on Tesla.
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The market's most-volatile stock, at least in terms of options expectations, is bitcoin-focused MicroStrategy (MSTR) , which has surged more than 152% this year alone amid the recent run of records for the world's biggest digital currency.
Consider, as well, that more than $100 billion of Nvidia shares changed hands last Friday, when the stock closed at an all-time high of $972.32. That volume tally was second only to the $150 billion in Tesla shares that traded prior to its addition to the S&P 500 in 2021.
This could add a significant new dimension to investors' focus on Nvidia's upcoming GPU Technology Conference, slated to begin March 18 in San Jose, Calif., which is likely to establish the centerpiece of AI ambitions for the coming year.
More AI Stocks:
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Trading.biz analyst Corey Mitchell, however, says it's too early to tell whether the recent Nvidia price moves and rising volatility suggest a more worrying trend.
"In 2023 and 2024 pullbacks of less than 12% have resulted in the price moving higher. Pullbacks of more than that have indicated choppy trading and bigger declines," he said. "Choppy trading means little to no progress above the recent high of $974."
Nvidia shares finished Wednesday trading off 1.1% at $908.88. The stock hit an all-time high of $974 earlier this month and has risen more than 84% since the start of the year.
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