2 Tumbling Mega-Cap Stocks That Could Keep Crashing

It can be tempting to take advantage of slumping stock prices. Sometimes the market goes overboard, pushing a particular stock into bargain territory. At other times, a big decline is just the beginning as the story that underpins a stock begins to unravel.

Both Nvidia (NASDAQ: NVDA) and Tesla (NASDAQ: TSLA) are getting slammed as investors hit the sell button amid growing unease about the economy, tariffs, and inflation. Here's why neither stock looks like a buy.

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Cracks in the AI boom

Shares of Nvidia, the overwhelmingly dominant supplier of artificial intelligence (AI) accelerators, have slumped around 20% from their 52-week high. The company's results remain impressive, and demand for its AI accelerators is still booming. Nvidia's data center segment generated more than $35 billion in its latest quarter, and profit margins remain sky-high.

Despite these results, market optimism appears to be fading. DeepSeek, a Chinese AI start-up that managed to train a top-tier AI model far more efficiently than equivalents from U.S. companies, upended the notion that more powerful models will require ever-increasing computing horsepower. There are also indications that AI companies are hitting a ceiling on capabilities. Case in point: OpenAI's latest GPT-4.5 model, which is wildly expensive and represents a minor improvement at best over previous models.

Here's the fundamental question: Are there enough use cases for AI to justify many hundreds of billions of dollars of spending on AI infrastructure, including Nvidia's AI chips and everything else that goes into a data center, annually? Increasingly, companies seem to be running into roadblocks actually implementing AI in useful ways. Apple, for example, delayed its revamped Siri assistant because the company is reportedly struggling to deliver on its promised features. OpenAI's Operator, which uses AI agents to perform tasks for users, was called "brittle and occasionally erratic" in a review by The New York Times.

There are plenty of legitimate use cases for AI technology, but there appears to be a good chance that the industry is greatly overselling the potential of this technology. Ultimately, large language models (LLMs) like those from OpenAI simply predict the next token, like a piece of text or a pixel in an image, in a stream of tokens. That's all they do. There's no real reasoning or thinking, and it's a far cry from how human intelligence works.

Nvidia's growth story depends on AI becoming increasingly more capable over time. If that's not happening, the massive build-out of AI computing capacity going on right now could be a one-time event that leads to oversupply. In that scenario, demand for Nvidia's AI chips would fall off a cliff, and the stock would likely follow suit.

A tarnished reputation

Investing in Tesla stock has always required a certain amount of mental gymnastics and an incredible amount of faith in CEO Elon Musk. Musk has recently predicted that Tesla's profits would rise tenfold over the next five years, driven by the electric vehicle (EV) business, humanoid robots, AI, and robotaxis. Investors should always take these types of forecasts with a grain of salt. As early as 2015, Musk said that Tesla's vehicles would be fully autonomous within about two years. That prediction was dead wrong, and full autonomy is still an unsolved problem today.

This faith in Musk appears to be unwinding quickly as the billionaire risks dragging Tesla's reputation into the swamp with his own. Musk's involvement in global politics, which among other things is causing his attention to be spread even more thinly, is likely losing him some fans. Tesla sales in various European countries are reportedly crashing, and prices on used Tesla's are tumbling. Increased competition is part of the equation, but not all of it.

Warren Buffett once said that it takes 20 years to build a reputation and five minutes to ruin it. The big risk for Tesla investors is that Musk may be in the "5 minutes" period right now. Even before the current drama, Tesla's sales were under pressure. Automotive revenue declined in 2024, as did the number of vehicles Tesla produced. Tesla's reputation is so deeply intertwined with Musk's that there's likely no way to separate them. Even if Musk were to step down as CEO, it won't undo the damage to the brand.

Tesla stock has crashed nearly 50% from its 52-week high, but the company is still valued at around $800 billion. For comparison, both General Motors and Ford are worth less than $50 billion each. Much of Tesla's valuation is built on a foundation of bold promises by Musk about autonomy, humanoid robots, and other future sources of revenue. If the belief among investors in that foundation continues to crumble, it will be a long way down for Tesla stock.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Nvidia, and Tesla. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.