What happened

It's Thursday, the Nasdaq Composite Index is plummeting -- now down 2.7% -- and it's taking the stock of Nvidia (NVDA -0.49%) along for the slide. Shares of the semiconductor giant were down 3.6% as of 1:10 p.m. ET today.

Stylized semiconductor computer chip flashes WARNING SYSTEM FAILURE.

Image source: Getty Images.

So what

In a note out earlier this week, analysts at TheStreet.com reported that the semiconductor sector is in a slump despite a tight supply of microchips globally, with manufacturers having just five days' supply of chips on hand (versus closer to 40 days' worth as recently as 2019). 

Nvidia in particular has been a victim of late, with its stock falling more than 20% over just the last couple of months. And TheStreet warns that it's "possible for Nvidia stock to fully break down and trade significantly lower" than that. "If the stock market goes into a full-blown roaring bear market, then Nvidia is going lower," TheStreet's Bret Kenwell said.

That prediction is proving prescient today, as Nvidia shares track the Nasdaq lower step by step -- and are even taking a few extra steps downstairs.

Now what

But one analyst's comments aren't enough to fully explain why Nvidia shares are heading lower. For one thing, Nvidia shares remain richly valued even after their recent slump, costing roughly 70 times earnings, when rival AMD costs less than half that, and Intel can be bought for just 10 times earnings.

Among semiconductor stocks, Nvidia looks almost uniquely vulnerable to bad news at such an elevated valuation. And earlier this week, the U.S. Commerce Department delivered some news that could be considered bad (for semiconductor investors, at least). While the chip supply chain "remains fragile," the Commerce Department said, a survey of more than 150 companies in the semiconductor supply chain showed that the global semiconductor shortage could begin to abate as early as the second half of this year.  

Furthermore, the agency foresees vast increases in semiconductor manufacturing capacity at Intel, Samsung, and Taiwan Semiconductor Manufacturing Company coming on line between 2022 and 2025. As new fabs begin churning out more and more chips, prices could plummet as supply begins to catch up with demand as early as a couple of years from now -- throwing into question optimistic analyst forecasts for 25% annualized earnings growth at Nvidia.

And since it's these same growth forecasts that are supporting Nvidia's sky-high valuation, the more that investors question the growth, the more they'll question whether they should be paying so much for Nvidia.