Nvidia dunks on the doubters

Nvidia’s Q3 results and Q4 outlook provided an emphatic statement that speaks for itself: it’s still boom times for the company at the heart of AI.

Nvidia putting up massive sales numbers is not, in and of itself, proof in favor of or against an AI bubble. A bubble needs irrationality, whether that be in valuations or earnings.

Nvidia came into this report trading at its lowest valuation relative to the S&P 500 since June (a forward price-to-earnings premium of less than 13%). Of greater concern is the potential for an “earnings bubble” — that is, Nvidia is benefiting from spending that ultimately won’t make much sense from the perspective of its customers, and is poised to retrench sharply once they figure that out.

CEO Jensen Huang also highlighted ways that people were already making a fortune off of early implementations. Talking about Meta’s GEM, he said, “In Q2, Meta reported over a 5% increase in ad conversions on Instagram and 3% gain on Facebook feed, driven by generative AI-based GEM.”

His underlying message: everyone’s AI spending pays dividends, even if the market isn’t rewarding it at this moment.

Heck, they even had a response to concerns about whether Nvidia’s customers are understating depreciation. Sure, the idea that Nvidia’s chips remain very useful for a long time is something that, on the surface, seems much better for Nvidia’s customers than its sales outlook, but it’s really hard to nitpick that given how much demand is in the pipeline.

The Takeaway

Huang spoke not only as the CEO of the world’s largest company, but also as an ambassador for AI, justifying the immense spending that benefits his firm by pointing to the rewards he believes his customers will reap.

This is the kind of conference call that will either have people revisiting some of these quotes and going, “I should have known this would be the first $6 trillion company,” or, “All this hubris was such a big tell that the AI trade was doomed.”

Or, depending on how much of a sense of humor the market gods have, both!