(Bloomberg) — Big swings in Nvidia Corp.’s stock. (NVDA) have reignited the debate about the staying power of the chipmaker’s rally. While stock valuation and the threat of competition are the main concerns, one variable is key: the stability of demand.
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For more than a year, Nvidia customers have been snapping up all the AI accelerator chips the company can produce. That fueled a doubling of Nvidia’s revenue in its last fiscal year to $61 billion, and sales are expected to double again in the current period.
To boost investors, that spending is just getting started as more companies look for ways to use artificial intelligence to help expand their businesses, create new products and improve efficiency. Nvidia’s revenue and profit growth in that scenario would boost the stock.
For the bears, there is still a lot of uncertainty about whether AI can live up to the hype and start delivering sufficient returns on investment. If not, demand is destined to cool and lead to a reckoning for Nvidia’s lofty valuation, which at 22 times forecast sales is the most expensive in the S&P 500 Index.
It’s that scenario that Michael Kirkbride, partner and portfolio manager at Evercore Wealth Management, says is his biggest fear for Nvidia, although he remains bullish on the stock.
“The long-term risk in all of this — and this is a multi-year risk — is that AI turns out to be a failure,” he said. “If AI turns out not to be the next Internet and turns out to be the next telecommunications, that will be a lot of money badly spent.”
Kirkbride refers to the costly construction of telecommunications networks in the 1990s in anticipation of a rapid increase in Internet traffic, which eventually materialized at a much slower rate. Heavy spending and overly optimistic forecasts helped drive stocks like Cisco Systems Inc. at levels it still hasn’t surpassed more than two decades later.
Investors got a taste of what a reckoning might look like for Nvidia stock when the seemingly unhinged chipmaker plunged 13% in just three days, wiping $430 billion off its market value. Shares bounced back on Tuesday, and after rising again on Wednesday, have recovered about half of their losses from the selloff. Shares of Nvidia fell 1.3% on Thursday after results from fellow chipmaker Micron Technology Inc. highlighted how the expectations associated with AI have in some cases turned out to be excessive.
Nvidia’s biggest customers – Microsoft Corp. (MSFT), Meta Platforms Inc. (META), Amazon.com Inc. ( AMZN ) and Alphabet Inc . – have collectively racked up more than $150 billion in capital spending in the past four quarters. A big part of that will go to Nvidia, which dominates the market for chips that do the heavy lifting in AI computing.
Not only have these companies vowed to keep buying this year, many say they plan to spend even more.
For Steve Eisman, senior portfolio manager at Neuberger Berman, who correctly bet against subprime mortgages before the 2008 financial crisis, this prospect of spending gives Nvidia stock plenty of room to keep rising.
DA Davidson’s Gil Luria is less certain. One of the few analysts on Wall Street with a hold rating on Nvidia, Luria admits that cloud service providers like Microsoft and Amazon will likely remain “hungry” for the next year or two, but after that he sees more too much uncertainty.
“These customers are going to have to deliver a very significant return on investment to justify more data center equipment and data center expense,” Luria said. “Until that happens, the expectations for Nvidia for 2026 and beyond look very, very ambitious,” he added, noting that so far, their returns are small compared to their spending.
John Belton, a portfolio manager at Gabelli Funds, admits that insufficient return on investment from customers could become a problem for Nvidia down the road, but he sees no reason to back the stock now.
“We are aware of the long-term dynamics and monitor them, but we will not sell a name with such strong fundamental momentum where we think things will improve in the near term.”
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Shares of Micron Technology Inc., the largest U.S. maker of computer memory chips, fell 5.8% after its forecast disappointed investors. Although Micron is getting a boost from the AI computing boom, demand is still sluggish in its traditional markets, such as personal computers and smartphones. These areas are just beginning to recover from a historic decline last year.
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—With assistance from Lisa Abramowicz and Ian King.
(Market updates are open.)
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