Nvidia gives Silicon Valley heartburn every three months
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Every quarter since ChatGPT's debut, Nvidia's earnings release has tied a knot in Silicon Valley's gut as investors wait for the numbers that will prolong the AI boom — or end it.
Why it matters: It's risky when any industry hangs so much of its hopes on one company's results, and Nvidia's enviable record of beating expectations means the slightest faltering could trigger a rout.
Driving the news: Today, markets await the chipmaker's first report since the arrival of DeepSeek's latest model last month cast a brief shadow over Nvidia's glow.
- DeepSeek rivaled the industry's most advanced AI models in a cheaply trained open-source package.
- That suggested the long-term demand for Nvidia's powerful but costly chips might be lower than projected.
Yes, but: Tech giants and startups in the U.S. and around the globe continue to pour hundreds of billions into AI infrastructure, new model training and data centers.
- All those projects keep orders flowing to Nvidia, which not only continues to lead the market for high-performing chips but also controls an ecosystem of supporting software tools that help AI makers optimize their products.
The big picture: There are three broader reasons to think that Nvidia could disappoint investors, if not this week then eventually.
1. The market is overconcentrated.
- The S&P 500's incredible run the last two years has been driven by gains in the so-called Magnificent 7 stocks, led by Nvidia (and also including Microsoft, Apple, Meta, Google, Amazon and Tesla).
- The Magnificent 7 accounted for more than half of the S&P's gains in 2023 and 2024, and now makes up more than 30% of the index's total market capitalization.
- By one key metric, the market was more concentrated in late 2024 than ever before — including during the dot-com bubble.
2. Demand for AI remains elusive.
- Nvidia's astonishing market ride rests on the assumption that AI will be the tech industry's next universal platform and that demand for AI products and services will be massive.
- So far, although ChatGPT and its rivals show healthy growth in usage, businesses and consumers haven't always embraced the tools. Real-world applications beyond a few specialized fields like software programming and customer support have yet to take off.
- If that doesn't change, the AI industry — along with its leading toolmaker, Nvidia — could face a sobering correction.
3. The AI chip market is uniquely vulnerable to geopolitical risk.
- That's because Nvidia only designs its chips. They're manufactured in Taiwan by TSMC.
- Taiwan has long faced the danger of an invasion or blockade by China, which has claimed the island for decades.
- Trump may have given Beijing reason to doubt he would step in to protect Taiwan. Among other remarks, Trump lamented during the campaign that Taiwan "wants protection" but "they stole our chip business."
The other side: Nvidia could keep outperforming expectations for a long time.
- A bad quarter for the company would also be a disaster for the market in the short term, but not necessarily for Nvidia's long-term outlook.
- Even if the AI bubble pops, the chipmaker would remain an incredibly valuable repository of intellectual property, design skills and research power.
- Short-term investors might take a bath, but the company would live to thrive again.
The bottom line: Silicon Valley's 75-year history has been one long cycle of booms and busts. With AI it shows every sign of continuing that pattern.
