AI bubble concerns tee up crucial Nvidia earnings report
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Growing concern about an AI bubble — fueled by companies investing in and buying from each other — serves as the pressing backdrop to Nvidia's critical earnings report on Wednesday afternoon.
Why it matters: Nvidia shares — and the broader stock market — have slipped in recent days amid debate over whether investors have gotten too bullish on the AI trade.
The big picture: Nvidia represents about 10% of the Nasdaq 100 ETF, so a sharp shift in the stock price will have an outsized impact on the broader market.
- "Historically, NVDA's one-day reaction to earnings has been a gain or loss of 7.9%, so tomorrow's report could be the catalyst that either breaks these support levels or turns the current period of weakness into a successful test of support," per Bespoke Investment Group.
Context: Nvidia CEO Jensen Huang offered something of an earnings preview at the Nvidia GTC event in Washington, D.C., in October, saying the company had already booked $500 billion in revenue for its Blackwell chips through the end of 2026.
- "The demand for Blackwell is significant, and understanding its impact on revenue will be essential for assessing Nvidia's growth trajectory moving forward," Melissa Otto, head of research at S&P Global Visible Alpha, tells Axios in an email.
- The spotlight will also be trained on whether Nvidia offers any hope of restoring access to China. Huang has argued that the U.S. will lose the AI race if American companies can't sell chips to China, but defense hawks say such chips could jeopardize national security.
What investors want to know is whether the whopping demand for Nvidia chips from the likes of Meta, Oracle, OpenAI, Tesla and other tech giants can continue unabated.
- Some observers are concerned about a circular loop in which AI giants are investing in each other and buying each other's products, potentially setting up the ecosystem for a dramatic collapse if something goes wrong.
- "We expect the near-term investor debate to remain centered on the sustainability of infrastructure investment, despite another round of hyperscaler capex increases/commentary on continued investment," Stifel analyst Ruben Roy wrote in a research note.
- "Concerns regarding vendor financing loops, financial sustainability of several key AI players, and recent supply side issues have increased," Roy added.
The bottom line: Nvidia has delivered a "triple play" — a raised outlook and a beat on revenue and earnings per share — in eight of its last 11 earnings reports, according to Bespoke.
- But it "has also traded lower from the open to close on its earnings reaction day eight times" during that period.
