Bubble fears ease but investors still waiting for AI to live up to its promise

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Fears about the artificial intelligence boom turning into an overblown bubble have diminished for now, thanks to a stellar earnings report from Nvidia that illustrated why its indispensable chips transformed it into the world’s most valuable company.

But that doesn’t mean the specter of an AI bubble won’t return in the months and years ahead as Big Tech gears up to spend trillions of dollars more on a technology the industry’s leaders believe will determine the winners and losers during the next wave of innovation.

For now, at least, Nvidia has eased worries that the AI craze propelling the stock market and much of the economy for the past year is on the verge of a massive collapse.

If anything, Nvidia’s quarterly report indicated that AI spending is picking up even more momentum. The highlights, released late Wednesday, included quarterly revenue of $57 billion, a 62% increase from the same time last year. That sales growth was an acceleration from the 56% increase in year-over-year revenue from the May-July quarter.

What’s more, Nvidia forecast revenue of $65 billion for the current quarter covering November-January, which would be a 65% year-over-year increase.

Given Nvidia’s forecasts, “it is very hard to see how this stock does not keep moving higher from here,” according to analysts at UBS led by Timothy Arcuri. The UBS analyst also said the “AI infrastructure tide is still rising so fast that all boats will be lifted.”

Nvidia’s numbers are viewed through a window that extends far beyond the Santa Clara, California, company’s headquarters because its products are needed by a wide range of companies — including Big Tech peers like Microsoft, Amazon, Alphabet and Meta Platforms — to build data centers that are becoming known as AI factories.

“AI spending isn’t just holding up, it’s accelerating. That’s exactly what the market needed to see,” said Jake Behan, head of capital markets for investment firm Direxion.

The numbers initially lifted Nvidia’s stock price by as much as 5% in Thursday’s trading, while other tech stocks tied to the AI spending frenzy also got a boost. But Nvidia’s shares and other tech stocks reversed course later in the session as investors found other issues besides AI, such as the government’s latest jobs report and the future direction of interest rates.

Even with a 3% drop in its stock price amid the broader market decline, Nvidia remains valued at $4.4 trillion, more than 10 times its valuation three years ago when OpenAI released its ChatGPT chatbot, triggering the biggest technological shift since Apple released the iPhone in 2007.

Nvidia’s rapid rise has turned its CEO Jensen Huang into the chief evangelist for the AI revolution and he sought to use his bully pulpit during a late Wednesday conference call with industry analysts to make a case that the spending to make technology with humanlike intelligence is just beginning.

“There’s been a lot of talk about an AI bubble. From our vantage point, we see something very different,” Huang insisted while celebrating “depth and breadth” of Nvidia’s growth.

Huang is hardly a lone voice in the wilderness. A recent report from Gartner Inc. estimates that worldwide spending on AI will rise to more than $2 trillion next year, a 37% increase from the nearly $1.5 trillion that the research firm expects to be spent this year.

But it remains to be seen if all that money pouring into AI will actually produce all the profits and productivity that proponents have been promising. That leaves the question unanswered if all the real spending that’s happening will be worth it.

The most recent survey of global fund managers by Bank of America showed a record percentage of investors saying companies are “overinvesting.”

Big Tech is already so profitable that many of the most successful finance their spending sprees with their ongoing stream of revenue and cash hoards in their bank accounts. But some companies, such as Meta Platforms and Oracle, are relying more heavily on debt to fund their AI ambitions — a strategy that has raised enough alarms among investors that their stock prices have plunged more dramatically than their peers in recent weeks.

Both Meta and Oracle have suffered more than 20% declines in their stock prices since late October.

But other Big Tech powerhouses leading the way in AI remain just behind Nvidia and iPhone maker Apple in the rankings of the most valuable companies. Alphabet, Microsoft and Amazon boast market values currently ranging from $2.3 trillion to $3.6 trillion.

“It is true that valuations are high and that there is some froth in the market, however, the spending on AI is real,” said Chris Zaccarelli, chief investment officer for money manager Northlight Asset Management. “Whether or not the spending turns out to be overdone won’t be known for many years.”

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AP Business Writer Stan Choe in New York contributed to this story.