Nvidia bounce shows Wall Street’s AI obsession is far from over

By Lewis Krauskopf and Laura Matthews

NEW YORK, Aug 26 (Reuters) – Nvidia’s results on Wednesday afternoon gave its investors another roller coaster ride, highlighting just how high the expectations for AI and its favorite chip designer have gotten on Wall Street.

Nvidia handily beat the consensus estimates for its second quarter and raised its third-quarter guidance. Second-quarter data center revenue rose 117% from a year ago to $89 billion, and the company said third-quarter revenue across the Santa Clara, California, firm should hit $108 billion, give or take.

Fans of the company saw more good news for the AI trade. But after a long run by Nvidia and the other megacap tech stocks, it wasn’t quite enough – at least at first. Shares opened the after-hours session lower and were little changed in late trading in the 40 minutes following the report.

Then the mood picked up after CEO Jensen Huang spoke on a conference call and said AI had reached an inflection point as part of a session that sent the shares up 4%.

“It’s hard to interpret the report as anything less than amazing,” said Seth Hickle, chief investment officer at Mindset Wealth Management, which owns both Nvidia shares and put options that give it the right though not the obligation to sell shares at a certain price by a specified date.

THE AI BELLWETHER DELIVERS

Results from Nvidia, one of the world’s most valuable firms, are considered a bellwether for the AI market as its chips power most of the major data centers and advanced AI models globally. Companies including Microsoft and Meta Platforms — two of Nvidia’s biggest customers — have recently reinforced expectations that Big Tech would spend more than $730 billion on AI infrastructure this year, an unprecedented sum that marks a big step up from last year’s $400 billion outlay.

Nvidia has been one of the most dependable performers in Silicon Valley in recent years and the signature stock of the AI-driven bull market that began nearly four years ago. Nvidia shares have soared some 1,700% in that time as the semiconductor giant became the world’s largest company by market value.

This year, though, its stock performance has been eclipsed by other chip companies which are expected to benefit from the massive buildout of AI data centers, while investors are increasingly anxious about the implications of the actions many large firms are taking to finance the buildout. Nvidia shares are up more than 12% year-to-date, trailing an over 60% rise for the Philadelphia SE Semiconductor index, but Nvidia remains a bellwether for the AI trade.

Pressure on many prominent AI firms stems from concerns about so-called circular deals featuring producers of AI goods as financiers of other firms in the ecosystems. Skeptics warn this practice could artificially inflate demand, distort broader economic signals and raise the risk of a sharp market pullback.

Nvidia said on Wednesday afternoon that its maximum gross exposure under all land, power and shell guarantee agreements total $3.5 billion, a fraction of its quarterly revenue.

THE GOOD NEWS FOR AI FANS

“It’s positive news for the AI sector,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana, which owns Nvidia shares.

“How it translates to AI stocks, that’s a tougher thing because the market right now, we’re in the midst of a rotation and is that rotation going to continue or is this going to jumpstart those stocks again?” Carlson added. “I don’t know if it was enough to do that, but in terms of the AI idea or investment thesis, I think this is still solid.”

The muted initial reaction in part reflects how many cycles of Nvidia excitement the market has been through. Heading into Wednesday’s report, Nvidia had beaten analyst estimates for eight straight quarters. Perhaps as a result, the chipmaker’s options were pricing in a 5.4% move in either direction when trading opens on Thursday, which is below the 6.5% move implied ahead of its May earnings report.

“With Nvidia trading within the market’s implied move, the options market got it right for now,” said Hickle. “The challenge for Nvidia isn’t delivering good numbers anymore, it’s delivering better than the great numbers investors already expect. In this case, beating Wall Street estimates is almost the price of admission.”

(Reporting by Lewis Krauskopf, Laura Matthews and Sinead Carew, editing by Colin Barr and Stephen Coates)