The Nvidia Problem

Ryan Heshmati

August 30, 2024

“Artificial intelligence” might very well be Nvidia CEO Jensen Huang’s favorite words. The epic AI boom has been incredibly beneficial for Nvidia and its stock. Thanks to surging demand from AI technology developments, as of July 29th, Nvidia stock is up almost 150% year to date. Consequently, Jensen Huang has obtained celebrity status, joining the likes of wildly successful technology executives like Steve Jobs and Elon Musk. With a valuation of around $3 trillion, Nvidia faces a serious challenge: competition with itself to maintain its track record.

Sure, massive revenue and stock growth are great, as long as it continues. With such a strong precedent set by the last couple of years, Nvidia has a tough road ahead in continuing to impress investors whose expectations might be lofty due to the company’s past success. With Nvidia’s much-anticipated earnings report on Wednesday, that became clear. Arjun Kharpal’s CNBC headline captures it succinctly: “Nvidia shares fall despite earnings beating estimates.” Kharpal points out the company beat on revenue guidance, too, estimating $32.5 billion for the third quarter, which would mean 80% year-over-year growth. Nevertheless, shares fell over 6%.

Where can a $3 trillion giant go? The same question could be posed about other intensely successful companies like Apple, Google, and Microsoft. Once a company reaches such heights, how can they keep the momentum? For diverse businesses, spinoffs might the solution some propose. Recently GE spun off Vernova from what is now GE Aerospace, and both stocks have performed incredibly well thus far. However, there are no reports that Nvidia is considering any such move. 

Nvidia has been basking in the glory of running a data center chips business at a time where demand for those chips is sky high, but, as often is in the corporate world, money attracts competition. CNBC’s Sheila Chiang noted in June that AMD announced new AI chips to compete with Nvidia, leading CEO Lisa Su to call AI AMD’s “number one priority.”

Nvidia was well positioned to benefit from the AI boom; but then again, Netscape appeared to be that way with the internet browser space during the Dotcom era. It was Google, in the end, that conquered that space. Of course, Netscape’s meteoric rise and fall never included revenues or valuations like Nvidia’s, but it is worth remembering how quickly an industry leader can lose hold in the technology space. Despite Thursday’s poor reaction to Nvidia’s earnings, by the numbers, the company is thriving. What the reaction to the report reveals, ultimately, is that expectations have already reached such heights that just thriving may not be enough for investors anymore. What has become certain is that Nvidia’s stock will be worth following as it navigates a massive valuation, incredibly high expectations, and industry competition.