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Eyes were on Nvidia (NASDAQ: NVDA) stock last week. The artificial intelligence chipmaker reported earnings. I can’t recall many other third quarters that have been this hotly anticipated. With comparisons to the heady days of the Dotcom Bubble doing the rounds in almost every newspaper, the latest results of the American company was the bellwether to end all bellwethers.
Before getting into the nitty and gritty of those results, it’s worth remembering the size of Nvidia now. The firm is the world’s largest company. Its $4.5trn market cap dwarfs the entire stock exchange of certain developed countries (like, ahem, the UK). An investor who owns a weighted global index fund has about 5% of their stake entirely in Nvidia! If ever there was a company significant enough to spark a stock market crash, this one might be it.
So what happened? Did earnings stutter? Have revenues fallen? Did the wheels come off the outrageous surge in spending on Nvidia’s high-performance chips used for artificial intelligence? Or was this yet another earnings beat as we head into a ChatGPT-infused future?
Something different
In short, the news was good. Sales for the third quarter were up 62% compared to the same three months in the previous financial year. Forecasts for sales for the fourth quarter were up another $8bn on that, notably beating estimates yet again. Nvidia shares were up 4% in aftermarket trading.
Chief Jensen Huang said: “There’s been a lot of talk about an AI bubble. From our vantage point, we see something very different.”
Nvidia still accounts for around 90% of the chips used in large language models like ChatGPT, Grok and Gemini. Therefore it’s hard not to look at the latest results as pouring a lot of cold water on the rumours of an upcoming stock market crash.
Or is it?
Returns
Another success story for Nvidia is not necessarily one for artificial intelligence as a whole. The chips it sells are like the shovels in a gold rush. At some point, there needs to be a return on investment.
Are the early signs of some serious ROI there? Are the green shoots of an AI-fuelled renaissance sprouting? Not that I can see. It’s early days, of course, but there simply isn’t the income-generating applications of these things. Not yet, anyway.
The risk for Nvidia is of a slowdown in sales. The forward price-to-earnings ratio of 26 could balloon upwards if the big tech companies stop making such huge orders. Nvidia will be fine for the next year at least (they announced around $500bn coming in) but after that there may be question marks as to whether these revenues can be sustained. As such, it’s not a stock I’m interested in buying.
