Nvidia’s Stock Faces Rare Downgrade Amid Concerns Over Pricing Power and AI Spending

In a surprising move, HSBC analyst Frank Lee has downgraded Nvidia Corp. (NVDA) to a hold rating from buy, a rarity amid a sea of bullish sentiments from the investment community. As of April 4, 2025, this downgrade is generating considerable discussion among investors, largely because the motivations behind it extend beyond the immediate concerns regarding tariffs imposed by the Trump administration.

Key Concerns About Nvidia’s Growth

While tariffs have been a focal point of financial discourse recently, Lee’s concerns primarily touch on Nvidia’s declining pricing power and the sustainability of artificial intelligence (AI) spending. Over the last few years, Nvidia has experienced remarkable growth, propelled by its stronghold on the market for AI graphics processing units (GPUs). However, Lee notes that the recent stagnation in average selling prices could signal a diminishing capacity for pricing power, which might cap the company’s earnings upside potential in the future.

“Over the past three quarters, the magnitude of Nvidia’s quarterly earnings and guidance beat has been getting smaller,” Lee remarked. This decline, he explained, is exacerbated by increasing scrutiny around the company’s capacity to ramp up its Blackwell supply chain.

Market Reaction to the Downgrade

The reaction from investors was immediate, with Nvidia’s stock plummeting by 7.8% on the day following the downgrade. Presently, it is down approximately 30% from its peak close achieved in early January. According to Lee, the difficulty in regaining momentum is compounded by anticipated limitations on earnings growth or stock multiple expansion. He emphasized the existence of “re-rating headwinds,” which likely means that investors may be reluctant to assign Nvidia a higher valuation despite its historical performance.

AI and Market Demand Uncertainties

Investor unease also stems from uncertainties characterizing Nvidia’s future market demand. A notable point of concern is China’s DeepSeek initiative, leading to speculations that companies might pivot to using less expensive hardware for training AI models. This could pose a threat to Nvidia’s market dominance.

Lee articulated that while the long-term implications of DeepSeek are still undetermined, another layer of concern revolves around potential capital expenditure reductions by significant cloud companies. “Although the sustainability of U.S. cloud-service-provider capex momentum has been an ongoing market worry since the AI boom began in 2023, we perceive emerging worries over long-term demand sustainability heading into 2026,” he noted.

Tariffs: A Minor Consideration

Interestingly, tariffs receive minimal focus within Lee’s analysis. He suggests that Nvidia’s recent momentum concerning H20 chips in the Chinese market may not endure due to apprehension surrounding ongoing H20 shipments amid the prevailing geopolitical landscape and the specter of tariffs. His mention of tariffs appears more as a peripheral concern rather than the central issue impacting Nvidia’s growth trajectory.

Analyst Sentiment and Price Targets

As of now, Lee’s downgrade places him among just six analysts tracked by FactSet who have assigned hold-equivalent ratings on Nvidia’s stock. The vast majority, comprising 61 analysts, maintain buy-equivalent ratings, underlining the significant divide in sentiment regarding Nvidia’s prospects.

Despite the downgrade, the average price target among all analysts stands at $173.16, a remarkable 67.3% premium over current levels. However, Lee has readjusted his target price substantially lower, moving it from $175 to $120, reflecting a cautious outlook amid the tumultuous landscape challenging Nvidia’s growth.

Conclusion

Nvidia’s recent downgrade by HSBC’s Frank Lee marks a pivotal moment for investors navigating the complexities of the AI and tech landscape. As the company grapples with profound challenges relating to pricing power and shifting market demands, stakeholders will need to monitor these developments closely to evaluate the stock’s future trajectory. While the majority of analysts remain bullish, the message from Lee serves as a stark reminder of the potential pitfalls that exist in the rapidly evolving world of technology and finance.