Nvidia's Huge Numbers Spark Fear Of More Disruption, Financial Instability

Damned if you do and damned if you don't. Nvidia posted huge quarterly numbers this week, which would ordinarily allay investors' persistent recent fears about AI weakening. But in the 'Alice Through the Looking Glass' world AI has created, those numbers are being interpreted by many investors as further evidence of the economic disruption and vulnerability to come.

With Nvidia dominating in so many aspects of tech, there is growing concern about concentration and about the negative impact AI is going to have on the broader economy. JL 

Dan Gallagher reports in the Wall Street Journal:

Nvidia now makes more revenue in a single quarter than most chip companies generate in an entire year. In a market awash in new AI fears, that’s no longer enough. Nvidia’s shares fell more than 5% Thursday. Fears of AI disruption that have pummeled software stocks have also weighed on the tech giants investing heavily in AI build-outs. Microsoft is down 17% this year while Amazon has fallen 10%. That is a vibe even Nvidia can’t fully counter. The company’s runaway success could be seen as a sign of the destabilization to come, given the massive amounts of capital spending that are filling its coffers while financially weakening the world’s largest companies—and employers. Worries about the financial health of its biggest customers will keep growing. Fears of AI sparking large-scale layoffs also raise the risk of a public backlash against the technology. decrease; red down pointis down 17% this year while Amazon.com has fallen by 10%. 

Nvidia NVDA -4.16%decrease; red down pointing triangle now makes more revenue in a single quarter than most other chip companies generate in an entire year. In a turbulent market awash in a new class of AI fears, that’s no longer enough. 

The chip maker’s fiscal fourth-quarter results Wednesday showed why the company remains the undisputed leader in artificial-intelligence computing. Revenue of $68.1 billion was up 73% from the same period a year earlier and represented the company’s best growth rate in four quarters. Nvidia projected an even higher growth rate for the current quarter, and that forecast actually beat Wall Street’s consensus target by the widest range in two years, according to FactSet data.

And yet, Nvidia’s shares fell more than 5% Thursday. It already hadn’t exactly been a strong performer of late, with a six-month gain of less than 8% lagging behind the Dow industrials and even most other chip companies. Nvidia’s share price has gone through other periods of turbulence over the past three years, as investors have sporadically worried about blowout AI spending creating a bubble that could suddenly burst.

This time is different, though. The growing capabilities of AI tools from companies such as Google, OpenAI and Anthropic have convinced investors that industries like software are in mortal danger while simultaneously driving strong interest in companies serving certain bottlenecks in the build-out of data centers. The latter includes makers of memory chips, hard drives, fiber-optic cabling and even power generators—Caterpillar’s CAT -1.34%decrease; red down pointing triangle 30% gain so far this year is leading the Dow.

But most other tech names have been under pressure. Fears of AI disruption that have pummeled software stocks have also weighed on the tech giants investing heavily in AI build-outs. Microsoft MSFT -2.24%decrease; red down pointing triangle is down 17% this year while Amazon.com has fallen by 10%. Investors are even reacting to works of fiction. A post from a finance blog called Citrini was framed as a research memo from the future and laid out a dystopian view of the effects of AI. That post went viral over the weekend and sparked a sharp selloff on Monday.

That is a vibe that even Nvidia can’t fully counter. In fact, the company’s runaway success could even be seen as a sign of the destabilization to come, given the massive amounts of capital spending that are filling its coffers while financially weakening the world’s largest companies—and employers. Alphabet GOOGL 1.42%increase; green up pointing triangle unit Google, Microsoft, Amazon and Meta Platforms META -1.34%decrease; red down pointing triangle are all expected to see notable declines in free cash flow this year, with Amazon expected to tip into negative territory, according to consensus estimates from Visible Alpha.

 

Nvidia just closed its fiscal year with $96.7 billion in free cash flow, and that number is expected to top $165 billion in the current year. That is great for Nvidia’s investors for now, but worries about the financial health of its biggest customers will likely keep growing. Fears of AI sparking large-scale layoffs also raise the risk of a public backlash against the technology.  

Nvidia’s leading position in the AI ecosystem looks secure. The company will use its GTC conference next month to highlight the launch of its Vera Rubin AI chip family later in the year. Those chips will offer a significant performance boost over even the Grace Blackwell lineup that is currently driving record sales and earnings.

 

But Nvidia is now in the odd position of having to play elder statesman, if only to temper some of the wilder views about AI. For instance, Nvidia Chief Executive Officer Jensen Huang told a conference earlier this month that the idea that AI will replace software is “the most illogical thing in the world.”

He made a similar statement in a CNBC interview on Wednesday—when major software names such as Salesforce CRM -2.35%decrease; red down pointing triangle, Snowflake SNOW -2.69%decrease; red down pointing triangle and Zoom ZM -2.12%decrease; red down pointing triangle posted their results. Huang understands that a world in which Nvidia makes all the money is actually not a great world for Nvidia either.