This analysis was first published in SvD Näringsliv, in Swedish, on August 22nd, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Nvidia crushed market expectations in May and the stock surged. Now everyone is waiting to see if the company can repeat the feat. But riding the AI hype comes with significant risk.
There is an old saying in business: “under-promise, over-deliver.” The well-tested model is about lowering expectations so that it is easier to surprise on the upside.
Jensen Huang, CEO and founder of the successful chip company Nvidia, works by a different playbook. Here, a great deal is promised. And yet the confident Huang manages to beat those expectations. Since AI technology exploded, his Nvidia has been the biggest winner on the stock market.
When Nvidia reported in May, it gave a forward-looking forecast that beat market expectations by over 50 percent. The stock surged. Total revenues for the coming quarter were projected at around $11 billion — roughly 120 billion kronor.
On Wednesday evening, we find out whether Huang has managed to live up to those numbers. Following the last success, some analysts believe Nvidia may surprise positively again.
The timing is in Nvidia’s favor. Interest in AI could hardly be greater, and now there are signs of a broadening customer base beyond the well-known tech giants like Google and Microsoft.
The United Arab Emirates has access to thousands of similar chips, and the UK is reportedly about to make a major investment in the area. Last week, the Financial Times reported that Saudi Arabia had purchased at least 3,000 of Nvidia’s H100 chips. That may not sound like much, but an H100 costs nearly 450,000 kronor — each.
The chips are primarily used for what is called generative AI, where products like ChatGPT and Midjourney have made their names. These purchases suggest that the centralization we have previously seen around cloud storage and similar services may develop differently in this wave of AI expansion. If more countries and companies invest in their own capacity, the market would grow substantially.
Beyond the initial investments to build AI capacity, Nvidia also offers services that help with refining and inferencing the available data. This is a more ongoing stream of work that extends several years into the future beyond the initial purchases.
Being exposed to a technology in an extreme hype does come with risks, however. Nvidia’s stock has almost become synonymous with a belief in AI. It is therefore worth considering what would happen to it if interest — and appetite to invest — in the technology were to diminish.
During the summer, preliminary research from Stanford and Berkeley universities showed that answers from ChatGPT had become significantly worse. It is unclear what may have caused this, but the question marks suggest we are still in a very early stage when it comes to artificial intelligence.
That new technology will revolutionize society and business is also something we have heard before. Most recently, it was blockchain technology and cryptocurrencies that were going to rewrite the balance of power in the economy — but which lately have mainly led to massive losses and scandals.
The crypto exchange Coinbase had a similar type of association, and went public in spring 2021 at a price of $381. The price now is just above $70. Coinbase is in every meaningful sense a completely different kind of company than Nvidia, but the strong association with a single new tech phenomenon looks similar — and points to a possible scenario that is not as glittering as the one Jensen Huang paints.
Nvidia does not appear particularly worried about this risk. On the contrary, they seem to be looking for more areas to expand their exposure to the industry. In winter 2022 they called off the billion-dollar acquisition of British chip developer Arm, owned by SoftBank. Objections from regulators in both the US and Europe were so significant that the deal could not go through.
But this does not appear to have deterred Nvidia. Instead, they are rumored to become an anchor investor in Arm’s IPO — announced this week — which may happen as early as next month. The two companies are already partners today — despite the failed acquisition — and the collaboration could now become even closer.
The sharp rise this year — a tripling of market capitalization since the start of the year — means that Nvidia’s performance affects more than just its own shareholders. It is now the fourth-largest company on the Nasdaq, and its weighting in the index is more than double that of companies like Cisco, Netflix, or Intel.
If Huang manages to beat expectations again, the whole market could be smiling.
