By Deborah Mary Sophia
(Reuters) - Nvidia (NASDAQ:NVDA)'s shares recouped earlier losses to trade higher on Wednesday, propping up chip firms after a bruising sell-off in the prior session, in a sign that AI optimism on Wall Street held out despite concerns around the stocks' lofty valuations.
AI heavyweight Nvidia rose 1% after opening in the red and dipping about 3% premarket. That followed Tuesday's 9.5% fall which wiped out $279 billion from Nvidia's market value, in the biggest ever single-day decline for a U.S. company.
The collective market valuations of seven of the biggest beneficiaries of the AI boom - including Nvidia, Advanced Micro Devices (NASDAQ:AMD) and Broadcom (NASDAQ:AVGO) - have dipped to $3.99 trillion as of previous close, from $5.06 trillion in mid-June.
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 Micron Technology (NASDAQ:MU) , Broadcom and Qualcomm (NASDAQ:QCOM), were up between 1% and 2.3% on Wednesday.
U.S.-listed shares of TSMC - Nvidia's chip manufacturing partner - also edged 1.3% higher.
AMD climbed nearly 4% after the company late on Tuesday named former Nvidia executive Keith Strier as its senior vice president of global AI markets.
Meanwhile, Intel (NASDAQ:INTC) slipped 1%. 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."