Nvidia's knockout earnings give tech a giddy whiff of 1995

How it works: Winners in the earliest phases of tech growth cycles like this one are always the sellers of the raw hardware businesses need to build out capacity in new platforms.

Flashback: In the mid-1990s, when every corporation in America suddenly realized they had to get onto the internet, there was only one company ready to supply, in bulk, the routers firms needed to connect. Cisco Systems made many fortunes as a result.

Today, the hot commodity is Nvidia's AI chips — specialized processors that are fine-tuned to accelerate the calculations underlying ChatGPT and other generative AI applications.

• That has put the company at the white-hot center of AI investment, and left Nvidia with more demand than it can handle.
• "A new computing era has begun," Nvidia founder and CEO Jensen Huang said in a statement. "Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI."

Driving the news: Nvidia reported $13.5 billion in revenue for its second quarter of 2023 — up 88% from the previous quarter and well ahead of the $11.2 billion that analysts were expecting. Sales were also more than double those from the same quarter a year ago, so it's not just a seasonal or cyclical change.

• Doubling revenue isn't unheard of for growth companies. Doubling it at this scale is rarer.
• Nvidia's forecast was also exceptionally bullish, with the company predicting revenue of $16 billion for the current quarter, well ahead of analysts' estimates of around $12.6 billion.

Between the lines: There's one unique factor contributing to Nvidia's knockout numbers, beyond broad AI fever.

• The global race to stockpile Nvidia's AI chips got a big boost from the Biden administration's sharp moves to keep advanced AI hardware out of China's hands.
• That has pushed Chinese firms to place $5 billion in orders from Nvidia this year, per the Financial Times, including orders for a special AI chip designed to comply with new U.S. export restrictions.
• Other nations, including Saudi Arabia and the UAE, have rushed to stockpile Nvidia chips as well, to hedge against the possibility of further U.S. limits.

The bull case: "This is NOT hype, it's jaw dropping spending happening NOW," Wedbush analyst Dan Ives wrote on Twitter.

• "It's all about AI demand and use cases," Ives wrote. "The rest of tech will see this unprecedented spending wave not seen since 1995 over the coming years but Nvidia is on the front lines and the best barometer of true spending."

The bear case: Most booms are short-lived, and history shows the tech industry almost always overshoots, building way more capacity than it needs anticipating massive demand that often takes much longer than predicted. (See: the over-investment in bandwidth from the mid-90s to the early 2000s.)

• The chip industry is especially prone to this sort of cycle, and things can turn around quickly. Remember when car manufacturing lines slowed due to a lack of chips back in 2021? By this year, the industry was facing a glut of chips.
• Another factor that pushes these cycles to extremes: Companies tend to double their chip orders in times of shortage, then find themselves with extra inventory once consumer demand weakens.

What they're saying: An Nvidia representative told Axios that the company has been in close contact with its customers and doesn't believe it is seeing double ordering.

• As for China, CFO Colette Kress said on the call that Nvidia believes it can absorb the types of export restrictions being discussed without taking a hit. But she warned that a long-term ban on the sale of data center GPUs to China would end up hurting the U.S., resulting in "a permanent loss of an opportunity for the U.S. industry to compete and lead in one of the world's largest markets."