Chief Investment Strategist
US equities fell more than 2% yesterday driven by Nvidia shares down almost 10% as the DOJ sent a subpoena to Nvidia in an antitrust probe extending the case from previously just questions about Nvidia’s business dealings. The decline yesterday happened under more or less average volume potentially suggesting that the price pressure came from retail investors as we would likely have seen higher volume if institutional investors were also panicking about the antitrust probe. Nvidia said in an emailed statement to Bloomberg that it wins on merit and superior product value to customers. Nvidia shares are down 2% in pre-market trading.
When idiosyncratic events hit a company it is important that an investor thinks about the base rate of the event. In other words, can we use history to infer the likelihood of this event causing a dramatic impact on the business.
The big picture is that the number of antitrust cases since the late 1970s has declined steadily as the enforcement of antitrust changed from focus on market power, which was the dominant characteristic behind the Standard Oil antitrust case, to that of consumer welfare protection. It was not seen as bad to have market power if it did not cause harm to consumers with Amazon and Walmart being cases of this new view that took hold after the late 1970s. Since then all statistics show that industry concentration, the amount of market share concentrated among a few companies, has gone up and up.
As long as antitrust laws focus on consumer welfare benefits and not market power government prosecutors know that cases are difficult to win outright. Therefore the recent strategy has involved an aggressive litigation strategy that sometimes can force companies to settle and change a little bit. But recent evidence from antitrust cases against big US technology companies shows that antitrust probes have little impact on the long-term business. Antitrust cases also take years which means that by the end of the case the industry has already changed so much that it makes little difference.
It is important to understand that this probe is not going to fundamentally change Nvidia’s outlook in the short-term. Investors should not ignore this risk, but they should not panic either. There are other key risks to consider including growing competition over time (the technology industry is collaborating to loosen Nvidia’s grip on the market) and a recession.
Adding to the negative sentiment in semiconductor stocks including Nvidia was also the weak ISM Manufacturing report for August showing that new orders are now the weakest since early 2023 and on par with the 2012 period and the 2008 just before the credit crunch started after the Lehman Brothers bankruptcy. These figures raise the recession probability for at least the capital goods part of the economy. Why does that matter for Nvidia? Semiconductors are more sensitive to a recession than other industries because it is a capital intensive industry driven by long-term projects. In a recession companies will cut down on capital expenditure projects like semiconductors quickly and semiconductors are also used in every consumer device in the world so demand falls quickly in a recession. This scenario is likely also playing a role in Nvidia’s declining share price.
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