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Debate Rages Over Nvidia’s Rally Amid Volatile Shares
Nvidia Corp. has seen significant fluctuations in its stock, rekindling a vigorous discussion about the sustainability of its upswing. While the chipmaker's valuation and competitive threats are hot topics, the main focus is on the durability of demand. For over a year, Nvidia's AI accelerator chips have been in high demand, driving a substantial increase in revenue, which more than doubled to $61 billion in the last fiscal year. This upward trend is expected to continue, with projections indicating another near doubling in the current period.
Enthusiastic and Cautious Investors
Bullish investors believe that spending on AI technology is just beginning, as businesses seek to harness AI for expansion, new products, and efficiency improvements. This scenario suggests that Nvidia's revenue and profit growth will continue to push stock prices higher. Conversely, bearish investors question whether AI will prove to be as transformative as expected. If AI doesn't deliver significant returns, demand may wane, potentially affecting Nvidia's high valuation, which is currently the most expensive in the S&P 500 Index.
Historical Parallels and Recent Market Movements
Michael Kirkbride, a portfolio manager at Evercore Wealth Management, expresses concern that AI might not live up to its hype, likening it to the telecommunications build-out in the 1990s, which initially promised rapid growth but ultimately progressed slowly. This scenario led to prolonged underperformance for companies like Cisco Systems Inc. Nvidia experienced a taste of this volatility when its shares plunged 13% in three days, losing $430 billion in market value, though the stock has since recovered about half of those losses.
Customer Spending and Future Outlook
Nvidia's major customers, including Microsoft, Meta, Amazon, and Alphabet, have spent over $150 billion on capital expenditures in the past year, much of which benefits Nvidia. These companies have pledged to continue or even increase their spending this year. Steve Eisman, a senior portfolio manager at Neuberger Berman, finds this outlook promising for Nvidia’s stock. However, D.A. Davidson's Gil Luria, while acknowledging strong near-term demand, foresees uncertainty beyond the next two years, with substantial return on investment needed to justify continued spending.
John Belton of Gabelli Funds is cautiously optimistic, recognizing potential long-term challenges but maintaining confidence in Nvidia's current strong performance and momentum. He sees no immediate reason to divest from a stock with such promising short-term prospects.
Broader Tech Industry Insights
Shares in Micron Technology Inc., another major chipmaker, fell 5.8% following disappointing forecasts, highlighting the uneven impact of the AI boom across different tech sectors. While Micron benefits from AI, its traditional markets like personal computers and smartphones are still in a recovery phase from last year's downturn.
Other Notable Tech Developments
Amazon.com Inc. plans to counter rising discount competitors with an online storefront for budget apparel and home goods. China's dominance in the electric vehicle sector, supported by government subsidies, is contributing to ongoing trade tensions with the US and Europe. SoftBank Group Corp.'s Vision Fund 2 is investing in the AI startup Perplexity AI, reflecting continued interest in the AI sector. SpaceX is set to offer insider shares at $112 each, potentially boosting its valuation close to $210 billion.
Earnings Update
No significant earnings reports are expected imminently.
--With inputs from Lisa Abramowicz and Ian King. Market status updates continue.
©2024 Bloomberg L.P.
