The AI bubble could also be about to burst after Nvidia shares plunge

Listening to a chief executive deliver a corporate report on his quarterly earnings is not most people’s idea of a great party.

Except when the company concerned is Nvidia, the US computer chip designer otherwise known as The Most Important Stock on Planet Earth.

The accolade is no small achievement for a business with an almost unpronounceable name, the brainchild of a man who once worked as a dishwasher in a fast-food restaurant.

(If you are struggling to enunciate Nvidia out loud, apparently you should say en-VID-ia, not NER-vid-ia. It is based on the Latin word invidia, meaning envy, and was chosen because founder Jensen Huang believed his business would be so brilliant it would provoke that emotion in competitors.)

Back to that party. It was thrown in Manhattan by a young woman named Lauren Balik, who took over a bar and invited her fellow Nvidia nerds to watch Huang present its results on TV.

Bubbles and balloons were bobbing around the venue as Huang addressed his shareholders.

These were not just standard party accessories, they were symbols of the debate surrounding Nvidia.

In the eyes of sceptics, it is at the centre of a vast tech bubble on the brink of bursting.

The party did not turn out to be much of a celebration.

Nvidia’s market value fell by $100billion following the results. These, although excellent by most standards, fell short of sky-high expectations.

Small investors in the UK are, whether they realise it or not, heavily exposed to Nvidia’s fortunes.

Some have bought the shares directly. Others have invested in funds that hold the stock such as Blue Whale Growth and the Scottish Mortgage Investment Trust.

No-one, however, is immune to the Nvidia effect.

It is at the heart of the Artificial Intelligence (AI) frenzy sweeping Wall Street and the City.

As a bellwether for AI and with a valuation of around $3trillion, the vagaries of its share price have an impact on markets as a whole and therefore our savings and pensions.

Arguably, its results have become equally if not more important than major economic announcements by the UK or US government, or major central banks.

The question on everyone’s lips after the recent sharp drop is whether Nvidia’s gravity-defying rise about to come to a screeching halt.

There are certainly signs that enthusiasm for the company has been overdone.

Revenues rose by 122 per cent, compared with the previous year, to $30billion, ahead of its own predictions.

In any kind of normal world, that would be seen as a great outcome.

But on planet Nvidia, hopes were so high that these figures were viewed as an anti-climax.

Share prices are, of course, about the future not the past, giving as they do a measure of what investors believe to be the prospects for a business.

‘Investors want more, more and more when it comes to Nvidia,’ says Dan Coatsworth of investment platform AJ Bell.

‘Despite the company’s best efforts to talk up the opportunities once again around AI, it wasn’t enough to prevent a share price sell-off.’

To put that sell-off into perspective, shares are up nearly 150 per cent in the past year.

The company has plenty of fans who appear supremely sanguine about the recent setback, viewing it as barely a blip.

Fund manager Stephen Yiu, who has invested 10 per cent of his Blue Whale Growth fund in Nvidia, told investment website Citywire that the results ‘are a non-event’.

‘Our take is that nothing has changed in regard to the reassuring comments from Jensen Huang that 2025 is going to be a significant year for its data centre business,’ he said.

The rise of Nvidia to its current status has been astounding.

It first listed on the public markets on the eve of the Millennium and since then has become the success story of the 21st century so far.

Over the past five years, its shares have risen by nearly 2,800 per cent.

The reason Yiu and others have piled into Nvidia can be summed up in two words: Artificial Intelligence (AI).

The company, which in its early days focused on video games, makes graphics processing units (GPUs) – wafer-thin circuit boards with a powerful microchip at the core.

Nvidia’s GPUs are to be found in smart cars, robots and data centres. Crucially, they are behind OpenAI’s ChatGPT chatbot.

It is well ahead of rival chip designers and makers such as Advanced Micro Devices and Intel.

One reason for the frosty reception given to its figures is worry over delays and additional costs with its new Blackwell AI chips.

These are to follow on from the current generation of chips, known as Hopper.

Huang tried to address concerns over the Blackwell chip, though the plunge in the shares indicates he did not entirely succeed.

‘The functionality of Blackwell is wonderful, we are sampling it all over the world,’ he said in an interview with Bloomberg TV.

He added that Nvidia has started volume production and will begin shipping the chips to customers in the fourth quarter of this year.

‘We will have billions of dollars of Blackwell revenues,’ he said, adding that they are ‘much more energy efficient’ than previous generations.

‘We are one of the fastest growing tech companies in history,’ he said.

That is undoubtedly true, but it is also becoming harder and harder for Nvidia to maintain the pace.

As Dan Coatsworth says, this has ‘triggered alarm bells that the AI gravy train might be losing power.’

Nvidia’s fans believe there is still plenty of potential. Companies need more and more processing capability, more storage and more power to carry out more complex tasks with AI.

‘We’re going to have a great next year as well,’ Huang declared.

He pointed to the scope for Nvidia to benefit from ‘Sovereign AI’, as countries including Japan, India, Canada and the UK look to build their AI infrastructure to boost their economies.

‘A country’s digital data is part of their natural resource like oil,’ he said. ‘They want to harvest it and turn it into their digital intelligence,’ he said.

But as Ben Barringer, tech analyst at broker Quilter Cheviot points out: ‘Nvidia has grown to a point where there is little room for error, and any sign of slowing or normalisation of growth will have an outsized effect on the share price.’

The general view is that Nvidia shares were ‘priced for perfection’ and that even the faintest slip of the halo would knock them back.

The response of some in the City and on Wall Street is: who cares?

John Higgins, chief markets economist at Capital Economics says: ‘So what if Nvidia was priced for perfection? That doesn’t mean the party is over or that the AI bubble is bursting.’

True believers argue Nvidia is way ahead of rivals as the only company currently able to produce the GPUs that power AI.

But there is plenty that could go wrong. To state the obvious, Nvidia’s future depends on the widespread adoption of AI, so if that does not go as expected, the fall-out could be nasty.

Even if it does, Nvidia could face challenges to its dominant position from competitors, and from regulators. The US Department of Justice is investigating complaints from rivals over alleged anti-competitive behaviour.

It is also vulnerable to disruption in its supply chain: its high-end AI chips are produced in Taiwan, which is under threat from a belligerent Beijing.

AI will consume huge amounts of energy which may be difficult to supply and likely to attract the ire of green vigilantes.

Underlying the rise of Nvidia is the near-universal view in market and business circles that generative AI, which can create high quality content, will transform companies, industries and whole societies.

But what if it doesn’t?

Companies will spend $1trillion in the next few years on chips, data centres and other AI infrastructure, according to investment bank Goldman Sachs.

Some of Goldman’s experts wonder whether that enormous spending binge will ever pay off.

Jim Covello, the head of global equity research, says it is ‘certainly debatable’ that AI will ever ‘deliver on the promise many people are excited about today’.

‘The less debatable point is that AI technology is exceptionally expensive and to justify those costs it must be able to solve complex problems which it isn’t designed to do.’

He adds: ‘Many people seem to believe that AI will be the most important technological invention of their lifetime but I don’t agree, given the extent to which the internet, cellphones and laptops have fundamentally transformed our daily lives.’

Covello says he struggles to believe AI will ever be able to acquire the cognitive reasoning to replace human interactions. Human beings add the most value to complex tasks, he argues, because we understand nuance in a way a computer never can.

A comforting thought in the man v machine debate, but what might it mean for investors?

Even arch-doubter Covello thinks the spending on AI will continue regardless of his scepticism.

Investors should, he says, stay in Nvidia for the time being, and in utilities and other companies involved in the expansion of power grids, which will be needed to supply the huge amounts of energy needed to run AI technology.

Nvidia’s share price and the AI goldrush in general may look like a bubble – and that Manhattan party is the kind of thing that has cautious investors looking for safer havens.

But let’s give Jim Covello the last word for now. ‘One of the most important lessons I have learned over the past three decades is that bubbles can take a long time to burst.’