The stock market experienced a downturn last week, with AI stocks taking a hit. Nvidia Corporation (NASDAQ: NVDA) dropped significantly, despite the absence of negative data points related to AI. The company’s Neutral investment thesis remains upheld, as the stock exhibited excessive growth during its rally to $974. Positive AI Data Points To clarify the sudden decline, it’s crucial to note that AI-related data points from last week were not negative, contrary to market interpretation. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) projected strong growth rates of over 20% in 2024 due to high AI demand. While the foundry acknowledged a slowdown in overall chip demand, TSMC attributed this primarily to traditional server CPU chip demand, which favors chip production for Nvidia over Intel (INTC). Super Micro Computer (SMCI) announced its FQ3 ’24 earnings call without providing guidance updates. However, this does not necessarily indicate a negative signal for AI GPU demand, as the company has not consistently provided guidance updates in the past. Paying the Right Price Nvidia was previously identified as aggressively priced at over $600, leading to recommendations for investors to exit their positions. The stock has since surged to $974, indicating an irrational appetite for AI investments that is now fading. Nvidia’s forecasted sales for FY25 (2024) are $112 billion, projected to exceed $160 billion by FY27. While the company’s sales growth rates are expected to normalize, the FQ1 ’26 sales growth forecast is estimated to drop below 30%. Margins and Operating Expenses Nvidia faces the potential for margin compression in the future. The company’s FQ1 ’25 gross margins were projected at 76.3% to 77.0%, with limited quarterly operating expenses of $2.5 billion. Over time, Nvidia will likely need to invest more to maintain profitability. The operating expense base below 10% of revenues also appears unsustainable. During FY23, before the AI GPU chip sales surge, Nvidia spent nearly $7 billion on opex, which amounted to over 25% of revenues. If this trend continues, Nvidia’s opex will rise significantly. Takeaway Despite the recent market downturn, the AI boom is not ending. The market is taking profits on Nvidia, and further declines are possible during the digestion period. Investors are advised to let the stock slip further, potentially back to the $600 range, to mitigate the risk of inevitable margin pressures.