Nvidia's $50 Billion Record Demonstrates That the AI Surge Is No Dot-Com Bubble
Investors are growing concerned with some underlying issues in momentum stocks, but the AI leader continues to thrive.
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The buzz words around town have been data center and credit default swaps (CDS).
The culprit behind all of this was Oracle (ORCL) as its CDS rallied such that it implied a probability of 10% that the company would go bankrupt over the next five years. But some of the smaller data center companies, called "neoclouds," had CDS implying a 40% chance they would go bankrupt.
A recent JPMorgan report talked about how, just to drive a 10% return on modeled AI investments through 2030, about $650 billion of annual revenue would be required in perpetuity, which comes to about $180 per month from every Netflix subscriber! It also said that the AI buildout needed about $5.3 trillion for it all to be worked out, which is pretty much unfundable.
It is true that these companies are investing for the future, i.e., they see a trend and are using more and more of their free cash flow to fund this growth. Hyperscaler capex is forecasted to grow to $550 billion next year. And now they are even tapping into the debt markets, as clearly it can't all be funded by their organic cash flows. The debate whether this is a bubble or not continues to grow every day and when legends sell their stakes in (NVDA) or buy puts, it causes jitters.
What most fail to realize is that we are in the midst of a truly paradigm shift in technology and human behavior and the work ecosystem. Just like the internet changed forever the way mankind performed functions, so too will AI. It is easy to see the nosebleed charts of some of these stocks and compare it to the dot-com bubble. But an interesting distinction is that during the dot-com bubble, stocks were trading at crazy multiples with little to no earnings. This time, the earnings are actually rising and keeping up with the forward multiples of these companies.
The S&P 500 is only down 5% from its highs, but the sentiment matches that of April, during the nadir of Trump tariff uncertainty or the 2020 COVID times. The index may look OK, but it is what is happening underneath the surface that is causing room for concern. The more levered parts of the market, the momentum stocks, are down anywhere between 20% to 40% in the last month. This was the setup going into NVDA earnings on Wednesday night, which came out beating its forecasts not only for this quarter, but also raised guidance for its revenues for next quarter too!
Its data center revenue delivered a record $51.2 billion in Q3, this represented a growth of about 66% year over year and 25% quarter over quarter as compute demand keeps accelerating. NVDA is showing how data center growth is real and making money. Also, it reiterated that some of the older chips are still being used to completely kill off arguments of depreciation and overestimating earnings as their shelf life is a lot longer. This should alleviate some fears in the sector as CEO Jensen Huang reported a blowout quarter and said that demand has never been stronger and his firm is "sold out."
Investors have been worrying about Federal Reserve interest rate strategy for weeks now. The Fed has cut about 150 BPS since last year, at a time when inflation is still close to 3.2% and the labor market, though it is showing signs of cooling off, is nowhere as bad as the Fed thinks it is.
On Thursday, we saw the BLS publish the September jobs report 48 days late saying that the U.S. added about 119,000 jobs in September versus expectations of 530,00.The unemployment rate ticked higher to 4.4% versus 4.3%. It seems the Fed always panics too soon as its bar to cut is a lot lower than its bar to raise. Whether or not it misread the data, one thing is for sure, the Fed put is alive and well, even if it means causing inflation in the future.
