The AI Valuation Battle Isn't Over Just Because Nvidia Is Doing Well
Nvidia's powerful earnings and optimism are leading to target increases across Wall Street Thursday. But has the chipmaker saved the market?
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The market is set to gap higher on Thursday morning following a much better-than-expected earnings report from Nvidia (NVDA) . The report numbers beat estimates, and guidance was improved, but it was management's optimism on the conference call that excited investors. Jensen Huang, CEO of Nvidia, stated, "There's been a lot of talk about an AI bubble. From our vantage point, we see something very different."
Analysts are increasing price targets for Nvidia across the board. Early on Thursday, Citi's target jumped to $270 from $220, and Deutsche Bank raises its target to $215 from $180. There should be dozens more increases by the opening bell.
Several strategists are declaring that the Nvidia report has cleared the way for a substantial year-end rally. Analyst Dan Ives at Wedbush calls it a "monster quarter," with earnings and revenue — especially data-center sales — topping expectations. Ives has been a leading cheerleader for AI from the start, and he stated that Nvidia's $65 billion sales outlook is a significant catalyst for both the stock and the broader AI boom. He believes that concerns about an AI bubble are "way overstated," and expects a strong day across semiconductor names such as Advanced Micro Devices (AMD) , Taiwan Semiconductor (TSM) , and ASML Holding (ASML) .
Is it that simple and easy? Have concerns about an AI bubble been washed away by Nvidia's stellar results?
The problem is that Nvidia and other chipmakers are suppliers of AI infrastructure. They are making money from hyperscalers and other companies developing AI technology that need infrastructure.
The primary criticism of the AI bears is that the companies paying billions to Nvidia are unlikely to see significant returns on those massive investments. Bears like Michael Burry, famous for predicting the 2008 housing crisis, are questioning how companies like Microsoft (MSFT) and Alphabet (GOOGL) are accounting for their massive purchases from Nvidia. He also questions some of the circular deals that fund the spending that benefits Nvidia. Nvidia is funding hyperscalers who then use the funds to buy chips from Nvidia.
The bull/bear battle over AI valuation is not over just because Nvidia is doing well. The critical issue here is that Nvidia is primarily a supplier of infrastructure that benefits from massive spending, not an AI developer. The companies throwing all that money at Nvidia need a payoff on their investments, and that hasn't changed because of the Nvidia earnings report.
The most important issue now is price action. We will see very quickly whether the market is buying the narrative that Nvidia has wiped out the AI bubble narrative and set the stage for a year-end rally.
About two weeks ago, investors were giddy with excitement over a very strong report and guidance from Palantir Technologies (PLTR) . The CEO of Palantir was probably even more optimistic than Nvidia management was on Wednesday night. However, Palantir sold off and is still struggling to find support after sinking more than $40.
Nvidia is holding on to gains in the early going Thursday, but it will be the close that counts. Also, we need to watch how the hyperscalers react to Nvidia. Both Google and Microsoft have relatively small gains in the premarket.
My game plan is not to chase the open on Thursday, but see how well things hold up as the day progresses. I have a long shopping list, but I'm not feeling any FOMO and am not in a rush to deploy my precious cash too quickly. I would like to see better chart development before I hit the buy button.
At the time of publication, Rev Shark had no positions in any securities mentioned.
