Nvidia stock falters 7% in 2026 as Meta races ahead with in-house AI chips

Nvidia investors have endured a disappointing 2026, with the chip giant's stock up only 7% so far this year—a sharp contrast to the 58% gain posted by the PHLX Semiconductor Sector index over the same period. Although Nvidia's financial performance remains solid, with stronger growth expected in the current fiscal year and a robust revenue pipeline supporting future expansion, market sentiment has shifted as investors increasingly favor other semiconductor stocks positioned to capture the AI chip boom.

The catalyst for investor concern is Meta Platforms' aggressive move into custom chip manufacturing. Reuters reported that Meta will begin producing its own in-house AI chip starting in September, with the goal of raising its overall AI compute power to 14 gigawatts (GW) by 2027. The chip's rapid development—it completed testing in just six weeks with no major issues—suggests Meta's approach is viable. The social media giant is partnering with Broadcom on chip design and Taiwan Semiconductor Manufacturing for production, and it is planning four generations of in-house processors to support its AI data center infrastructure. This vertical integration strategy allows Meta to tailor chips to its specific requirements and, crucially, reduce its reliance on the expensive graphics processing units (GPUs) it purchases from Nvidia. Meta CEO Mark Zuckerberg disclosed last year that the company was on track to deploy 1.3 million GPUs by end of 2025, a significant portion of which would have come from Nvidia, which controlled an estimated 80% to 90% of the AI chip market until last year.

The broader industry context reinforces investor anxiety. Market research firm TrendForce anticipates a 45% jump in custom AI processor sales this year, compared to a 16% jump in GPU sales, signaling a structural shift toward inference workloads that custom chips can efficiently handle. Yet Nvidia's actual performance contradicts the narrative of GPU decline. According to tech publication The Information, Nvidia's share of AI inference chips increased by eight percentage points year over year in Q1 to 74%, and its inference revenue exceeded the combined AI revenue of rivals such as Broadcom and Advanced Micro Devices. Moreover, even as hyperscalers develop in-house chips, they continue to purchase Nvidia's cutting-edge processors. Meta itself expanded its Nvidia agreement in February 2026 for large-scale deployment of Nvidia CPUs and millions of Nvidia Blackwell and Rubin GPUs, along with Nvidia Spectrum-X Ethernet switches for Meta's Facebook Open Switching System platform. This dual strategy—building custom chips while deepening Nvidia partnerships—suggests both approaches will coexist in AI infrastructure.

From a valuation perspective, Nvidia offers a compelling opportunity for patient investors. The stock trades at 23 times forward earnings, compared with the S&P 500 average of 21.5 times, providing a reasonable entry point. Analysts project solid earnings growth ahead. If Nvidia's earnings per share reach $16.06 within three years and the stock trades in line with the S&P 500 average multiple, the stock price could reach $345, representing potential upside of 70%. Despite 2026's disappointing performance and the structural headwinds in GPU demand, Nvidia's dominant position in AI inference, continued customer reliance on its premium chips, and robust earnings trajectory suggest it could prove to be a long-term winner for investors willing to hold through near-term volatility.

Nvidia's 7% stock gain in 2026 reflects investor perception rather than fundamental weakness, as the chip giant remains on track for stronger growth in its current fiscal year and maintains a sizable revenue pipeline. The underperformance stems from a structural shift in the AI chip market: hyperscalers like Meta are aggressively developing custom processors to reduce dependence on Nvidia's expensive GPUs and lower their computing costs. TrendForce projects custom AI processor sales will jump 45% this year compared to a 16% jump in GPU sales, underscoring this industry trend.

However, the data tells a more nuanced story than the headline suggests. Nvidia's AI inference chip market share actually grew to 74% in Q1, up eight percentage points year over year, and its inference revenue surpassed the combined AI revenue of major competitors Broadcom and Advanced Micro Devices. This apparent paradox—Meta building in-house chips while also expanding its Nvidia orders—reveals that custom processors and Nvidia's cutting-edge GPUs are complementary, not mutually exclusive. Meta expanded its Nvidia agreement in February 2026 for large-scale deployment of Nvidia CPUs and millions of Blackwell and Rubin GPUs, demonstrating that even as hyperscalers reduce GPU dependence, they continue to rely on Nvidia's most advanced chips to power complex AI workloads.

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