Nvidia's Stock Tanks Due to AI Market Volatility: Here's What History Says Happens Next

Nvidia's (NASDAQ: NVDA) fiscal 2025, which ended Jan. 26, featured impressive financial performance, with revenue soaring 114% year over year to $130.5 billion and diluted earnings per share rising 147% to $2.94. Despite the strong results, the company's stock is down about 14% since the earnings release on Feb. 26.

Is this dip a buying opportunity, or is it better to avoid Nvidia now? Let's assess some important fundamental and historical trends to understand what they can mean for the company's share price trajectory in the coming months.

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Multiple headwinds

Nvidia is currently battling several macroeconomic and company-specific headwinds. Investors are concerned about increasing macroeconomic uncertainty and rising geopolitical tensions.

In addition, the Biden administration's "AI Diffusion" rules, which place stricter restrictions on artificial intelligence (AI) chip and algorithm exports to China, are set to take effect in May 2025. This can further exacerbate Nvidia's challenges.

At the Morgan Stanley Technology Conference, Nvidia Executive Vice President and CFO Colette Kress highlighted that the company's export volumes to China are already half of what they were before the export controls. A tightening in export restrictions can make it difficult for Nvidia to compete in China.

Furthermore, the Trump administration's plans to impose tariffs on imported goods from China, Canada, and Mexico could disrupt Nvidia's supply chains and increase overall manufacturing costs.

Nvidia is also seeing a significant deceleration in growth rates of its highly coveted data center segment. Compared to triple-digit growth rates in the prior quarters, the data center segment grew by a modest 20% year over year in the fourth quarter of fiscal 2025. This slowdown, coupled with intensifying competition from U.S. and non-U.S. AI players, has raised questions about the sustainability of Nvidia's premium valuations in the coming years.

AI dominance

Despite the many challenges, Nvidia is a dominant force in the AI market. The recently introduced Blackwell architecture system has proved to be the fastest product ramp-up in Nvidia's history. Blackwell Systems contributed $11 billion in revenue in the fourth quarter.

With Blackwell, Nvidia is eyeing the huge global AI inferencing market (deploying and running trained models), estimated to grow from $106 billion in 2025 to $255 billion in 2030. The company has already earmarked many early GB200 (Grace-Blackwell Superchips comprising two Blackwell B200 GPUs and one Grace CPU) deployments for inferencing workloads.

CEO Jensen Huang has also highlighted "reasoning AI," a more complicated type of inference workload, as a major opportunity for the company, as is evidenced by the release of new models such as OpenAI's o3, DeepSeek-R1, and Grok-3. Reasoning AI requires 100x more compute resources per task compared to simple AI inferencing tasks. With Blackwell systems architected specifically to support reasoning AI inference models and involving 20 times lower cost compared to previous Hopper 100 chips, Nvidia is well-positioned to capture a significant share of this opportunity.

Nvidia also stands to benefit from a phenomenon called Jevons paradox. Accordingly, as foundational models become more resource-efficient and can be trained at lower costs, they will make AI more accessible and ubiquitous across a wider range of uses. As demand surges, spending on AI infrastructure will further surge. Hence, the release of DeepSeek-R1 and other competitive models can be a boon in disguise for Nvidia.

Consequently, Nvidia is gearing up to grow rapidly in multiple AI-powered verticals such as agentic AI, physical AI (robotics), autonomous vehicles, and sovereign AI.

What next?

Once a stock market darling, Nvidia stock seems to have taken a heavy beating due to increasing economic uncertainties, rising tech sector volatility, and intensifying competitive pressures. An increase in insider and institutional selling activity in the past year also seems to have affected investor confidence.

However, this is not the first time Nvidia has seen a significant drawdown in share prices. There have been multiple instances when the stock crashed and recovered even stronger. The company's stock fell by almost 55% from its peak of nearly $292 in October 2018 to $124 in December 2018 on the back of excess GPU inventory due to a dramatic decline in crypto mining demand. However, Nvidia tackled this challenge by refocusing on data center and gaming segments. Subsequently, the company's stock rebounded by nearly 80% in 2019.

Nvidia's shares also tanked on fears around the COVID-19 pandemic. Again, it recovered by almost 129% from the lows in March 2020 to the end of 2020 on a split-adjusted basis, driven by a robust rebound in gaming demand, rising data center revenue, and strengthening AI businesses.

Finally, Nvidia saw a pullback of almost 19.5% in July 2024 due to worries about a potential slowdown in AI spending. However, the stock had recovered by 40.6% by October 2024, as investor confidence rose for the company's fundamentals and financials.

Hence, a majority of the time, Nvidia's stock demonstrates short-term volatility, with strong corrections followed by recoveries. If this trend continues, investors can expect the stock to rally in the next few months.

However, investors should be vigilant of the broader technology landscape to prevent getting trapped in a longer consolidation phase. Investors can opt for a dollar-cost averaging strategy to build a position in this stock while controlling overall risks.

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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.