(Bloomberg) — Wild swings in Nvidia Corp. shares (NVDA) have reignited the debate on the sustainability of the chipmaker’s rally. If the valuation of the stock and the threat of competition constitute major concerns, one variable is essential: the sustainability of demand.
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For more than a year, Nvidia customers have been snapping up every AI accelerator chip the company can produce. This helped Nvidia’s revenue double in its most recent fiscal year, to $61 billion, and sales are expected to nearly double again in the current period.
For bullish investors, this spending is only just beginning, as more companies look for ways to use artificial intelligence to help them grow their businesses, create new products and improve efficiency. Nvidia’s resulting revenue and profit growth in this scenario would propel the stock higher.
For bears, there is still a lot of uncertainty over whether AI can live up to the hype and start generating sufficient returns on investment. Otherwise, demand is bound to calm down and reflect the high valuation of Nvidia, which, at 22 times projected sales, is the most expensive in the S&P 500 index.
It’s this scenario that Michael Kirkbride, partner and portfolio manager at Evercore Wealth Management, says is his biggest fear about Nvidia, even though he remains bullish on the stock.
“The long-term risk in all of this – and it is a multi-year risk – is that AI turns out to be a failure,” he said. “If it turns out that AI is not the next internet and it turns out to be the next telecommunications company, that will be a lot of money misspent.”
Kirkbride is referring to the costly construction of telecommunications networks in the 1990s in anticipation of a rapid increase in Internet traffic, which ultimately materialized at a much slower pace. Big spending and overly optimistic projections helped propel stocks like Cisco Systems Inc. to levels they still haven’t surpassed more than two decades later.
Investors got a taste of what Nvidia stock’s bottom line might look like when the chipmaker, seemingly out of the blue, plunged 13% in just three days, wiping out $430 billion in market value. Stocks rebounded on Tuesday and, after rising slightly on Wednesday, recouped about half of their losses from the selling. Shares of Nvidia fell 1.3% on Thursday after results from fellow chipmaker Micron Technology Inc. highlighted how AI-related expectations in some cases proved excessive.
Nvidia’s biggest customers – Microsoft Corp. (MSFT), Meta Platforms Inc. (META), Amazon.com Inc. (AMZN), and Alphabet Inc. – have collectively invested more than $150 billion in capital spending over the past four quarters. Much of that goes to Nvidia, which dominates the market for chips that do the heavy lifting in AI computing.
Not only have these companies pledged to continue buying this year, but many say they plan to spend even more.
For Steve Eisman, the senior portfolio manager at Neuberger Berman who rightly bet against subprime mortgages before the 2008 financial crisis, this spending outlook gives Nvidia shares enough room to continue to rally.
Gil Luria of DA Davidson is less sure. One of the few Wall Street analysts with a hold rating on Nvidia, Luria acknowledges that cloud service providers like Microsoft and Amazon will likely remain “insatiable” for a year or two, but after that he sees more uncertainty.
“These customers will need to provide a very significant return on investment to justify more data center equipment and spending,” Luria said. “In the meantime, expectations for Nvidia for 2026 and beyond look very, very ambitious,” he added, noting that so far their returns pale in comparison to expenses.
John Belton, portfolio manager at Gabelli Funds, acknowledges that insufficient customer returns could become a problem for Nvidia in the future, but he sees no reason to bail out the stock now.
“We are aware of the long-term dynamics and we are monitoring them, but we are not going to sell a name with such strong fundamental dynamics, when we think things will improve further in the short term. »
Technical table of the day
Shares of Micron Technology Inc., the largest U.S. maker of computer memory chips, fell 5.8% after its forecast disappointed investors. While Micron is benefiting from the boom in AI computing, demand remains sluggish in its traditional markets, such as personal computers and smartphones. Those regions are only beginning to recover from a historic slump last year.
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Earnings expected on Thursday
—With help from Lisa Abramowicz and Ian King.
(Updates for market opening.)
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