Key takeaways
- Wall Street analysts were encouraged by Nvidia’s earnings report, with many saying the strong results would likely alleviate some of the recent pressure on AI stocks.
- Nvidia’s earnings illustrated that demand for AI infrastructure remains exceptionally strong, which some believe will support AI stocks.
- Skeptics argued that Nvidia’s growth is itself evidence of a growing AI bubble.
A lot was riding on Nvidia’s (NVDA) earnings report, and the AI chip giant did not disappoint.
“These results and comments should help stabilize the course of AI trading through the end of the year,” Jefferies analysts wrote in a note Thursday.
Wednesday night’s report from the company at the center of the AI boom came at a precarious time for the AI rally. The debate over whether AI stocks were in a bubble reached a new level of intensity in recent weeks, driven by concerns about the size of the tech sector’s data center spending, the longevity of AI infrastructure and the commercial potential of the nascent technology.
The market reaction on Thursday showed that the debate is far from resolved. The tech-heavy Nasdaq Composite soared more than 2% early in the session, before falling to trade down nearly 2% in the afternoon. Nvidia shares, which rose 5% Thursday morning, recently fell nearly 3%. (Read Investopedia market coverage here.)
Why this is important for investors
AI stocks have come under pressure in recent weeks on concerns about overvalued stocks and uncertain investment returns. Wavering sentiment on AI threatens to undermine one of the driving forces behind the bull market of the past three years.
How did the markets like Nvidia’s earnings?
The strong results from Nvidia helped ease fears of an artificial intelligence bubble on Wall Street on Thursday.
Nvidia reported that revenue soared 62% to $57 billion last quarter, and projected sales would rise to $65 billion in the current quarter. Gross margins improved from Nvidia’s previous report and are expected to increase to nearly 75% this quarter.
“Bubbles are irrational, with prices rising despite weaker fundamentals. Nvidia’s numbers show that fundamentals remain strong,” said David Russell, global head of market strategy at TradeStation.
Additionally, executives on the company’s earnings conference call addressed investor concerns about AI’s return on investments, monetization prospects and infrastructure longevity.
CEO Jensen Huang emphasized the broad range of applications powered by Nvidia chips and cited social media giant Meta’s (META) improved ad conversions as evidence that “the transition to generative AI represents substantial revenue gains for hyperscalers.”
“Thanks to CUDA,” Nvidia’s accelerated computer programming interface, “the A100 GPUs we shipped six years ago are still running at full utilization today,” said CFO Colette Kress. The comment may have been a response to hedge fund manager and AI boom skeptic Michael Burry, who recently accused tech companies of arbitrarily extending the life expectancies of their GPUs to understate the cost of building their data centers.
And now what?
Most of Wall Street agreed Thursday that the outlook for Nvidia is rosy.
“With these figures, it is very difficult to see how this stock will not continue to rise from now on,” the UBS analysts said. “Ultimately, the tide of AI infrastructure continues to rise so fast that all boats will be lifted,” they added.
But some market watchers remain concerned.
“The AI bubble debate has never been about whether or not NVIDIA can sell chips,” said Julius Franck, co-founder of AI company Vertus. “Their excellent results don’t address the elephant in the room: Will customers who buy all this hardware ever make money on it?”
Others noted that investors may need to be more discerning if skepticism about the rise of AI persists.
“Many of the risks that are now worrying investors, such as overspending and asset depreciation, are real,” TradeStation’s Russell said. “We may see continued weakness in shares of companies that take on debt to build data centers, even if the boom continues.”
