A version of this story originally appeared in CNN Business’ Nightcap newsletter. To receive it directly in your inbox, sign up for free here. In a week filled with significant news, the most crucial story for the markets wasn’t the president’s attempted dismissal of a high-ranking Federal Reserve official. Instead, all eyes were on Nvidia’s earnings report, an event that has garnered Super Bowl-level enthusiasm within the financial community. Enthusiasts even host watch parties, complete with Mardi Gras beads, to celebrate this quarterly ritual.
It’s easy to understand the excitement surrounding Nvidia. If you had invested $1,000 in Nvidia (NVDA) shares just two years ago, your investment would now be worth an impressive $3,000. The stock has surged by 30% this year alone, significantly outpacing the S&P 500’s 10% gain. Nvidia consistently surpasses Wall Street's consensus forecasts, making it a darling among investors. So, what’s not to love?
Despite the overwhelming enthusiasm, some investors are starting to perceive the market surrounding Nvidia as increasingly bubbly. This sentiment has been exacerbated by comments from Sam Altman, CEO of one of Nvidia’s major customers, who has speculated that the AI sector might be a bubble. Here are some key reasons why caution is growing among investors.
Nvidia is not just a big company; it is unprecedentedly huge. With a market capitalization of approximately $4 trillion, it surpasses any public company in history. To put this into perspective, Apple was the first company to reach a $1 trillion market cap in 2018, and now we have nearly a dozen companies crossing this threshold, mostly within the American tech sector. Nvidia alone accounts for 8% of the S&P 500, meaning its performance can significantly impact the entire market.
Zooming out even further, Nvidia’s market cap represents about 3.6% of global GDP, according to Deutsche Bank. This is staggering for a company that derives half of its revenue from just three customers.
When discussing the AI industry, Nvidia is at the forefront. Products like ChatGPT, Anthropic’s Claude, and Google’s Gemini are all powered by Nvidia chips. Until recently, Nvidia was primarily recognized for its role in enhancing video game graphics. Now, it has become a pivotal player in the AI revolution, raising concerns about its market dominance. While it’s easy to see Nvidia as a leader in AI, one must tread carefully before labeling it a monopoly.
Investors are increasingly questioning what will happen if the AI technology Nvidia powers doesn’t live up to the revolutionary promises made by industry leaders like Sam Altman and Dario Amodei. What will occur when the gold rush surrounding this technology subsides? Recently, a wave of negative AI-related news, coupled with signs of an economic slowdown, has unsettled investors, leading to a tech sell-off just ahead of Nvidia’s earnings report.
Despite the hype, AI technology has yet to demonstrate a single use case that justifies the hundreds of billions of dollars being invested in it. Interestingly, AI-related capital expenditures from American tech giants have reportedly contributed more to GDP growth this year than consumer spending, as noted by Neil Dutta, head of economic research at Renaissance Macro Research. This statistic underscores the intense concentration of capital being funneled into AI infrastructure, raising concerns about whether it is truly a sound investment.
As Nvidia continues to dominate the market and shape the future of AI, investors must weigh the potential for growth against the risks of an inflated market. The excitement surrounding Nvidia's earnings report and its unprecedented market position reveals both the opportunities and challenges that lie ahead in the evolving landscape of technology and finance.
