Nvidia's Impressive Earning Allay Bubble Fears, Even Though Concerns Remain

Nvidia's earnings report, released after the market closed yesterday, exceeded even Wall Street's inflated expectations and served to dampen fears of a bubble, at least for now. 

But longer term issues remain. The market for AI chips is so concentrated, with Nvidia owning 90%, that it both benefits from the good times and is likely to suffer proportionately if, as many fear, AI hype exceeds its ability to deliver - on top of the physical impossibility of delivering on the required build-out, as reported in this space yesterday morning. For now, the optimists believe they have been vindicated, but the broader concerns about performance and customer acceptance remain. JL

River Davis and colleagues report in the New York Times:

After the U.S. market closed on Wednesday, Nvidia announced that its profit for the most recent quarter had surged 65% from a year earlier, reaching $31.9 billion. It also forecast revenue for the current quarter that significantly exceeded Wall Street’s projections. It helped ease anxieties about overinvestment in AI, which had weighed on shares of major technology companies in recent weeks. Nvidia commands 90% of the market for the chips crucial to A.I. projects

A bumper earnings report from the chipmaker Nvidia boosted global stock markets on Thursday as it helped to ease anxieties about potential overinvestment in artificial intelligence, which had weighed on the shares of major technology companies in recent weeks.

After the U.S. market closed on Wednesday, Nvidia announced that its profit for the most recent quarter had surged 65 percent from a year earlier, reaching $31.9 billion. It also forecast revenue for the current quarter that significantly exceeded Wall Street’s projections.

Nvidia, which commands roughly 90 percent of the market for the chips crucial to A.I. projects, has become the poster company for the artificial intelligence boom. Investors scrutinize its financial results as a bellwether for the prospects of companies around the world that are putting trillions of dollars into A.I.-related infrastructure.

Nvidia’s results helped to drive benchmark indexes in Japan and Taiwan up about 3 percent on Thursday. South Korea’s benchmark index rose nearly 2 percent. The Stoxx Europe 600 index rose 0.7 percent, ending a five-day run of losses. 

Gains were led by A.I.-related companies including Japanese semiconductor-equipment manufacturer Advantest, which climbed almost 9 percent. Taiwan Semiconductor Manufacturing Company and the South Korean chipmaker Samsung Electronics both rose more than 4 percent. Shares in ASML, a Dutch chipmaker, rose more than 2 percent. “It’s fair to say that Nvidia’s results have completely changed the market mood and pushed out any bubble fears for another day,” analysts at Deutsche Bank said in a note.

In the United States, Nvidia shares climbed more than 5 percent in premarket trading. Futures trading for the S&P 500, for which Nvidia is the largest component, rose about 1 percent. Advanced Micro Devices, a rival chipmaker to Nvidia, and other tech companies are also expected to see sharp increases when markets open on Thursday in New York.

“The largest technology companies in the world are extremely profitable and they are reinvesting billions of dollars into data centers, servers and chips, and the spending is real,” said Chris Zaccarelli, the chief investment officer at Northlight Asset Management. Nvidia and other tech firms have had meteoric growth since interest in artificial intelligence began to skyrocket three years ago. But investors have become more cautious since October as concerns mounted that lavish A.I. spending might be outpacing actual demand.

The American technology company Oracle saw its valuation decline by a quarter after it disclosed an additional, debt-financed investment in OpenAI in September. Before Nvidia’s earnings announcement on Wednesday, an exchange-traded fund from Global X that focuses on a basket of A.I.-linked stocks had dropped approximately 8 percent this month.

Investors are also awaiting key economic data, specifically the delayed September jobs report that the Labor Department is scheduled to release on Thursday. Those figures could intensify concerns about a slowdown in U.S. hiring and the overall health of the nation’s economy.

At the same time, minutes published Wednesday showed Federal Reserve officials are deeply divided over the path for interest rates, and that a cut next month was not a given. Traders slashed their bets on such a move, down to about a one-third chance.

The retailer Walmart, an indicator of U.S. consumer spending, will report earnings on Thursday. Its rival Target lowered its full-year forecast on Wednesday and warned of slumping holiday sales from a pullback in consumer spending.

“While a market pullback can happen at any time, as long as the economy can stay out of a recession, we expect the bull market to resume and for us to hit new all-time highs later this year and into next year,” Mr. Zaccarelli said.