The AI Party that Never Stops

Photo by UMA media

Yesterday, many investors started celebrating Christmas early because Nvidia’s blockbuster Q3 earnings report hit the market. There was a lot of anticipation before the release, as Wall Street projected positive results that were not only confirmed but ultimately exceeded. Many experts suggest this report could trigger a continued surge in AI investment. However, what potential pitfalls can lurk beneath this rosy picture, and will the music really never stop?

The Numbers

During Nvidia’s earnings call, the official report beat even the most optimistic expectations, posting a revenue of USD 57 billion. Adjusted Earnings Per Share (EPS) came in at USD 1.30,  both metrics up just over 50% compared with the same period last year. On the market side, Nvidia has climbed by 2% leading up to the report and another 4% after the report was released, recovering after an almost 10% decline from its late October highs. The rise in stock price was expected, since Nvidia has logged a 7.3% move the day after reporting results over the last 12 quarters. Nvidia finds itself in an unusual position: expectations were so high that even these strong results merely meet the bar; anything below stellar would have created fresh concerns. Jensen Huang, the CEO of Nvidia, does not seem to be bothered by this pressure at all, stating this week that Nvidia has “Half a trillion dollars worth so far” of business on the books, referring to the company's combined orders for 2025-2026.

Jensen Huang. Attribution: 總統府, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons

What It Means for Nvidia and the industry

These numbers suggest that Nvidia is likely to further strengthen its leading position in the AI infrastructure. Nvidia's strong performance reinforces confidence in continued demand for AI products, with fourth-quarter revenue expected to reach USD 62 billion and potentially wider margins. Due to its sheer size and dominance, Nvidia effectively serves as a strong indicator of the AI market. Nvidia’s standout quarterly results not only benefit the company but also help revitalise investors’ appetite for the AI industry. Recently, parts of the AI market appeared to cool down as investors became more selective, questioning the valuations of certain AI companies. This change of opinion can partly explain Nvidia's recent 10% drop in stock price. This earnings report sends a powerful message: the AI boom is still in full swing, not nearing its peak.

James Smith, CC0, via Wikimedia Commons

A Bubble that never bursts?

Talks of an “AI bubble” have been around for more than a year. More recently, Elliott Management, one of the most significant activist hedge funds in the United States, described Nvidia as a “giant bubble.” It further argued that much of the AI industry was massively overhyped. Yes, despite showing a few signs of cooling, the AI market, especially Nvidia, still shows strong momentum. The company is expected to generate more than USD 62 billion in revenues in the next quarter alone. Combined with its substantial numbers this quarter, Nvidia’s valuation is likely to keep climbing, and as long as it continues to do so, the whole AI industry will follow in its footsteps.

However, the growth is far from guaranteed. After years of extraordinary performance, Nvidia now has a very narrow margin of error; even the slightest misstep can significantly impact the stock price. 

One of the biggest challenges facing Nvidia is the escalating trade war between China and the United States. Washington has imposed a series of export restrictions on the sale of advanced AI chips to China. Jensen Huang stated it would be a “tremendous loss” for Nvidia to lose China’s USD 50 billion AI market. Furthermore, Beijing is ramping up its own AI chip production, posing further threats to Nvidia's chip dominance. 

Then there is the murkier, longer-term risk of AI oversupply. Nvidia's current growth model is built on sustained, rising demand for AI products. If Nvidia's production outpaces real-world usage, it could quickly find itself facing slower growth. The company may face a decline in new orders and enter an uncertain market, prompting it to reevaluate its strategies accordingly.

Suppose this scenario ever materialises and Nvidia sees a rapid decline in its value. In that case, it is very probable that it will not fall alone, dragging down the rest of the AI market with it.