Year to date, Nvidia (NVDA -1.01%) is down 2% even as the S&P 500's returns have been about flat. What gives? After all, Nvidia's financial performance recently has been astounding. The company reported accelerating top-line growth in its most recent quarter (fiscal Q3) as its earnings soared. Even more, Nvidia guided for very strong fiscal fourth-quarter results.
And there's another reason to be bullish. Tech giants, including Amazon, Alphabet, Microsoft, and Meta Platforms, have announced massive capital expenditure plans. Specifically, they expect to spend big on AI (artificial intelligence) -- Nvidia's bread and butter. This should be a boon for Nvidia's sales in the near term. Further, it shows that a slowdown in demand for AI chips is unlikely -- at least not anytime soon.
Is Nvidia stock's recent underperformance a red flag, or is this a buying opportunity?
Image source: Getty Images.
An AI scare
2026 has been marked by significant investor unease regarding AI. Yes, a handful of tech giants have announced plans to invest aggressively in AI, but the sheer scale of these commitments is somewhat concerning.
Amazon, for instance, said it expects to spend about $200 billion, yet its trailing-12-month free cash flow was just $11.2 billion. This suggests Amazon expects its free cash flow, or its cash flow from operations less capital expenditures, to be deep in the red in 2026. Such enormous spending seems to signal somewhat euphoric sentiment toward AI, even if Amazon told investors in its fourth-quarter update that it anticipates "strong long-term return on invested capital" from its capital expenditures.
While big spending from tech giants on AI-related infrastructure will almost undoubtedly help Nvidia maintain monstrous growth rates throughout 2026, investors may be concerned that this isn't sustainable for much longer.
Fast-growing in-house chip programs
Another thing that may be spooking some investors is tech giants' fast-growing in-house AI chip programs. Amazon, for instance, now boasts a chips business with an annual revenue run rate of more than $10 billion. In addition, its AI chip, Trainium2, is now "fully subscribed with 1.4 million chips landed," and Trainium2 is proving itself in the marketplace, with Anthropic using it to train its AI model, Claude. And demand for Trainium3 is off to a great start, too.
Further, Amazon, in particular, is extremely focused on reducing the costs of AI chips.
"A significant impediment today is the cost of AI chips," said Amazon CEO Andy Jassy in the company's fourth-quarter earnings call.
He continued:
Customers are starving for better price performance and typically and understandably, the dominant early leaders aren't in a hurry to make that happen. They have other priorities. It's why we built our own custom silicon in training. And it's really taken off.
If Amazon is successful in significantly reducing AI chip costs, competitors could increasingly choose alternatives to Nvidia chips, even if those alternatives are inferior.
Alphabet and Microsoft similarly have robust AI chip businesses and are increasingly relying on their in-house solutions to power their cloud computing needs.
NASDAQ: NVDA
Key Data Points
Valuation is a concern
The final reason Nvidia stock may be underperforming recently is probably its valuation. Yes, it's arguably unfair to judge a company with earnings growing as fast as Nvidia's by its price-to-earnings ratio, which is at 45 today. A better gauge of where the stock's valuation stands is probably its forward price-to-earnings ratio, which measures its price as a multiple of analysts' consensus earnings-per-share forecast over the next 12 months. Nvidia's forward price-to-earnings ratio is 24 today, suggesting the company will likely grow into its current valuation over the next 12 months.
Still, this forward price-to-earnings multiple may be too high if some of these concerns that have spooked investors materialize into real threats. For instance, if tech companies are euphorically overspending on AI today, there may be a period in which AI chip sales slow or even turn negative. Additionally, competing chip programs at Amazon, Alphabet, and Microsoft could yield good-enough alternatives at significantly lower prices, pressuring Nvidia's pricing power and, ultimately, its margins.
Overall, Nvidia remains an innovative company executing well. But there are risks, and the stock's recent underperformance seems to be pricing them in.
