Nvidia's strong forecast calms AI bubble jitters, for now

By Arsheeya Bajwa and Stephen Nellis (Reuters) -Nvidia CEO Jensen Huang on Wednesday shrugged off concerns about an AI bubble as the company surprised Wall Street with accelerating growth after several quarters of slowing sales. The chipmaker's stellar third-quarter earnings and fourth-quarter forecast calmed, at least temporarily, investor nerves over concerns an AI boom has outrun fundamentals. Global markets have looked to the chip designer to determine whether investing billions of dollars in AI infrastructure expansion has resulted in an AI bubble. "There's been a lot of talk about an AI bubble. From our vantage point, we see something very different," CEO Jensen Huang said on a call with analysts, where he touted how much cloud companies wanted Nvidia chips. "We're in every cloud. The reason why developers love us is because we're literally everywhere," he said. "We're everywhere from cloud to on-premise to robotic systems, edge devices, PCs, you name it. One architecture. Things just work. It's incredible." He reiterated a forecast from last month that the company had $500 billion in bookings for its advanced chips through 2026. Shares of the AI market bellwether jumped 5% in extended trading, setting up the company to add $220 billion in market value. Ahead of the results, doubts had pushed Nvidia's shares down nearly 8% in November, after a surge of 1,200% in the past three years. The broader market has declined almost 3% this month. After the results, S&P 500 futures rose 1%, showing traders expect the U.S. stock market to open sharply higher on Thursday. The world's most valuable company said it expected fiscal fourth-quarter sales of $65 billion, plus or minus 2%, compared with analysts' average estimate of $61.66 billion, according to data compiled by LSEG. It forecast an adjusted gross margin of 75% for the period, plus or minus 50 basis points, and Nvidia's finance boss Colette Kress said the company plans to hold gross margins in the mid-70% range during fiscal 2027. Nvidia's third-quarter sales rose 62%, their first acceleration in seven quarters. Sales in the data-center segment, which accounts for a majority of Nvidia's revenue, grew to $51.2 billion in the quarter ended October 26. Analysts expected sales of $48.62 billion. Nvidia's fortunes pushed up shares of rival AMD, as well as those of tech giants including Alphabet and Microsoft.  RESULTS MAY NOT BE ENOUGH TO QUELL BUBBLE FEARS Some analysts, however, said the earnings report may not be enough to quell AI bubble fears. "The concern that AI infrastructure spending growth is not sustainable is not likely to ebb," said Stifel analyst Ruben Roy. Nvidia in the third quarter sharply increased how much money it spent renting back its own chips from its cloud customers who otherwise cannot rent them out. Those contracts totaled $26 billion, more than doubling from the previous quarter. Cloud giants including Microsoft and Amazon are investing billions in AI data centers, and some investors have argued these companies were artificially boosting earnings by extending the depreciable life of AI compute gear, such as Nvidia's chips. Nvidia's business has become increasingly concentrated in its fiscal third quarter, with four customers accounting for 61% of sales, up from 56% in the second quarter. The company has also increased its bets on AI companies, investing billions of dollars into firms that are often among its most significant customers, leading to concerns of a circular AI economy. In September, it decided to invest up to $100 billion in OpenAI and supply it with data center chips. "While results and outlook were stronger than consensus expectations, we think investors will remain concerned about sustainability of its customers' capex spending increase and the circular financing in the AI space," said Kinngai Chan, analyst at Summit Insights. POSSIBLE IMPEDIMENTS TO GROWTH Largely locked out of China due to U.S. export restrictions, the chipmaker is tapping the Middle East for a new avenue of growth. The U.S. Commerce Department said on Wednesday it had authorized the export of the equivalent of up to 35,000 Nvidia Blackwell chips to two companies in Saudi Arabia and the United Arab Emirates. Per market estimates, those would be worth well above $1 billion. But factors beyond Nvidia's control could impede its growth. "While GPU demand continues to be massive, investors are increasingly focused on whether hyperscalers can actually put this capacity to use fast enough," said Jacob Bourne, an analyst with eMarketer. "The question is whether physical bottlenecks in power, land, and grid access will cap how quickly this demand translates into revenue growth through 2026 and beyond." Asked by an analyst on a call what the biggest constraint to Nvidia's growth was, Huang responded at length, underscoring the scale, newness, and complexity of the AI industry. He did not single out a reason, but said this transformation demanded careful planning across supply chains, infrastructure, and financing. (Reporting by Arsheeya Bajwa in Bengaluru and Stephen Nellis in San Francisco; Editing by Sayantani Ghosh, Matthew Lewis and Chris Reese)

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