Nvidia, the chipmaking giant that has been riding the artificial intelligence wave, has seen its shares enter "correction territory" as the stock has fallen 10% from its most recent all-time closing high. The company's shares closed at $853.54 on Tuesday, down 2% for the session, marking a significant pullback from the record high of $950 achieved on March 25.

Despite the recent decline, Nvidia's financial performance has been stellar over the past year, with the company reporting a 486% jump in non-GAAP earnings per diluted share in the December quarter, citing huge chip demand driven by the popularity of generative AI models. Nvidia's graphics processing units (GPUs) are commonly used for compute-intensive AI applications, such as OpenAI's ChatGPT, and its server chips are a key component of data centers.

The exact reason for the stock's decline remains unclear, but investors may be taking profits after the shares gained more than 200% in the last 12 months. Additionally, rival chipmaker Intel unveiled a new AI chip called Gaudi 3 on Tuesday, which the company claims is over twice as power-efficient as Nvidia's H100 GPU and can run AI models 1½ times faster.

Analysts at D.A. Davidson have expressed concerns about the potential impact of shrinking AI model sizes on Nvidia's future growth. In a research note, they stated, "Although NVDA (Neutral-rated) should deliver a spectacular 2024 (and perhaps into 2025), we continue to believe recent trends set up a significant cyclical downturn by 2026." The analysts cited factors such as more steady growth in demand, maturing hyperscaler investments, and increased reliance by Nvidia's largest customers on their own chips as potential headwinds for the company's long-term outlook.

Despite the recent slump, some analysts remain bullish on Nvidia's prospects. Morgan Stanley analyst Joseph Moore sees the broader market's AI investment theme and Nvidia's leadership position driving near-term growth, offering investors the best name in the sector to gain AI-related exposure. Moore lifted his Nvidia price target by $205 to $1,000 per share, suggesting a potential 17% gain from current levels over the next 12 months.

Nvidia's data-center sales, which house the group's AI-focused chips, were a staggering 410% higher year-over-year at $18.4 billion in the final three months of last year, reflecting the surge in demand from cloud-service providers like Microsoft and the broader AI ambitions of Magnificent 7 rival Meta Platforms. The company's gross-profit margins also widened by more than 12 percentage points to 76%, a figure expected to improve to 77% over the three months ending in May.

Ken Mahoney, president of Mahoney Asset Management, emphasized the widespread adoption of AI, stating, "AI is clearly being adopted and there are a ton of [business-to-business] transactions for [graphics-processing units] we are not seeing with the naked eye, as all these tech companies race to implement and monetize [it. And] Nvidia is at the forefront of all things AI."

As Nvidia prepares to report its first-quarter earnings on May 22, the last of the Magnificent 7 stocks to do so, expectations are high for the company's performance. LPL Financial's chief equity strategist, Jeffrey Buchbinder, predicts that the Magnificent 7 stocks are likely to see earnings grow 40% from a year earlier, while the rest of the S&P 500 will need to deliver significant upside just to match the earnings from the previous year.