ROI-Nvidia beat may yet stir fear on the Street: McGeever

By Jamie McGeever

ORLANDO, Florida, Nov 20 (Reuters) - Nvidia once again delivered a resounding earnings 'beat' on Wednesday, which may initially dampen some of the smoldering tech bubble fears. But, paradoxically, the $5 trillion company's latest figures actually highlight many of the AI concerns that have been roiling markets recently.

On the surface, the headline numbers are astonishing. The chipmaker's revenue in the third quarter was a record $57 billion, up 62% from a year earlier, and net profit rose 65% on the year to a record $32 billion.

Nvidia's forecasts are even more bullish, with revenue expected to rise to $65 billion in the fourth quarter, higher than analysts' average estimate of around $62 billion. Figures like that suggest the global artificial intelligence leader's cash-generating powers are as strong as ever.

Nvidia's shares jumped 5% in extended trading after the market close on Wednesday, adding around $225 billion to the firm's market cap in a matter of minutes.

"Blackwell sales are off the charts, and cloud GPUs are sold out," CEO Jensen Huang said, referring to two types of Nvidia chips. "AI is going everywhere, doing everything, all at once."

That's pretty exuberant language for a press release. And considering the growing fears about AI capex indigestion, it may be bordering on irrationally exuberant.

TOO MUCH INVESTMENT?

The key issue is simple: the tens of billions of dollars of revenues Nvidia is raking in every quarter are tens of billions of dollars its customers are spending, with little indication of when – if ever – all this investment will be profitable.

Huang repeated on Wednesday that Nvidia has $500 billion in bookings for its advanced chips through 2026. That's half a trillion dollars of AI hardware investment.

What's more, four customers accounted for 61% of Nvidia's sales in the third quarter, up from 56% in the second. That suggests increased concentration risk for Nvidia as well as the chip buyers.

These are big bets. The eventual productivity gains may be enough to make the outlay worth it. But we won't know for a while, and the bigger the spend, the higher that bar for profitability and the greater the risk that investors will grow impatient.

Indeed, their patience already appears to be wearing thin. Bank of America's November fund manager survey shows respondents overwhelmingly believe the most crowded trade right now is 'long' Magnificent Seven shares, and the biggest tail risk is an AI bubble.

FUND MANAGERS UNITE ON AI RISK

Were Nvidia's results strong enough to sustain its initial 5% share price spike and stifle concerns about its customers' ability to continue pouring billions into AI?

Looking at the past seven quarterly earnings reports, the average Nvidia share price move in the two days following the release has been a rise of 1.8%. Momentum is waning though. The biggest increase – a whopping 16% – was in February last year, and the average two-day move following the three releases this year has been a decline of almost 3%.

Of course, those declines pale in comparison to the shares' stratospheric rise. Nvidia became a $4 trillion company in July, only to see its market cap jump another trillion dollars in a mere three months.

But some high-profile shareholders have cashed out recently, with Japan's SoftBank and tech billionaire Peter Thiel's hedge fund ditching their Nvidia stakes during the third quarter. And the chipmaker's shares have slid more than 10% since peaking on October 29, helping to take some of the fizz out of the wider tech boom.

Will Nvidia's latest results spark a sustainable 'buy the dip' rebound, or deepen those bubble concerns? We'll soon find out.

(The opinions expressed here are those of the author, a columnist for Reuters)

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(Editing by Andrew Heavens)