Bubble Talk, Forecasts, and Chinese Orders

Nvidia (NVDA) delivered a robust fiscal third-quarter earnings report on Wednesday, exceeding expectations and providing a bullish outlook for the current quarter, reinforcing its position as a dominant player in the accelerating artificial intelligence landscape.

The market responded positively, with Nvidia shares experiencing a post-release surge, a trend mirrored by other stocks closely tied to the AI sector. This indicates a continued investor confidence in the growth potential fueled by AI development.

Digging deeper into the report reveals Nvidia’s continued command of the GPU market, the essential engine for AI applications. CEO Jensen Huang projected a confident and optimistic tone during the analyst call, emphasizing the company’s cutting-edge technology and strategic advantage.

Nvidia projects revenues of approximately $65 billion for the quarter ending in late January, a substantial 65% year-over-year increase, showcasing the rapid expansion of the AI market and Nvidia’s ability to capitalize on it.

Here are three key takeaways from Nvidia’s latest earnings report:

During Wednesday’s earnings call, CEO Jensen Huang directly addressed concerns regarding a potential “AI bubble,” a sentiment held by some investors wary of the massive capital investments being poured into Nvidia’s hardware and the associated return on investment.

“There’s been a lot of talk about an AI bubble,” stated Huang. “From our vantage point, we see something very different.” He articulated a multi-faceted growth narrative for AI deployment, arguing against a simplistic “capex and investment” view.

Huang outlined three key drivers: the increasing adoption of GPUs for general-purpose computing beyond traditional AI applications; the proliferation of new AI-driven applications; and the emergence of “agentic AI,” systems that operate autonomously without constant user input, demanding significantly more computational resources. This suggests a broadened applicability of Nvidia’s technology beyond current AI applications.

Huang emphasized the nascent stage of AI adoption, suggesting that the underlying value creation of the AI boom will soon be more apparent.

Analysts at Bernstein noted that Huang’s commentary on the earnings call quelled investor anxieties regarding a potential AI bubble, particularly following a recent dip in AI-related stock prices. The analyst note stated, “perhaps the AI trade is not yet dead after all,” highlighting the impact of Nvidia’s strong messaging.

“More than just good numbers, we believe investors needed some hand-holding from Jensen which he provided in spades,” the analysts added, underlining the importance of leadership’s confidence in maintaining market sentiment.

Building on previous statements, Nvidia reaffirmed its projection of $500 billion in AI chip orders for 2025 and 2026. This aggressive forecast underlines Nvidia’s leading role in powering the AI infrastructure for the world’s most influential technology firms.

During the call, Nvidia also clarified that its existing order backlog does not encompass recent partnerships like the expanded deals with Anthropic and Saudi Arabia, suggesting the $500 billion forecast may be conservative.

“The number will grow,” CFO Colette Kress stated, indicating that the company is primed to handle further increases in demand. She added, “We’ll probably be taking more orders,” reflecting a potentially underestimated demand for AI infrastructure.

“We see the opportunity to grow for quite some time,” Huang stated, alluding to a sustained, long-term growth trajectory in the AI market.

Analyst notes following the earnings release prominently highlighted the $500 billion forecast and the inclusion of newly announced partnerships as a continued source of growth.

Jefferies commented that Nvidia “answered the bell” with its earnings report and that the numbers should offer stability to the AI trade in the coming months, suggesting that solid results from Nvidia can steady the AI trade.

“We don’t expect every AI bear to be satisfied, but these results and added context from management around demand outlook should offer some near-term reprieve,” the analysts stated.

The US government granted Nvidia licenses over the summer to export its H20 chip, a slowed-down version of its 2022 technology, to China. Some analysts projected this venture to be worth potentially $50 billion per year for Nvidia.

Despite securing these licenses, H20 chip sales during the quarter were described as “insignificant” by CFO Colette Kress, with only $50 million in H20 sales recorded.

“Sizable purchase orders never materialized in the quarter due to geopolitical issues and the increasingly competitive market in China,” noted Kress. This suggests that broader geopolitical tensions are having a direct impact on Nvidia’s revenue streams and potentially limiting its market access in China.

Nvidia has advocated for the relaxation of export restrictions, arguing that allowing Chinese developers access to Nvidia’s latest technology is strategically advantageous for the US, as it allows the company to remain competitive globally and could deter China from developing potentially superior domestic alternatives.

While the H20 represents older technology, Nvidia remains eager to receive approval to export versions of its current-generation Blackwell chips to China. The company argues that limiting access to its technology could inadvertently bolster China’s domestic AI chip development.

“While we were disappointed in the current state that prevents us from shipping more competitive data center compute products to China, we are committed to continued engagement with the U.S. and China governments and will continue to advocate for America’s ability to compete around the world,” Kress stated.

Analysts at Melius remarked on the “all the more extraordinary” nature of Nvidia’s results given these challenges in the Chinese market. They project Nvidia will generate around $400 billion in free cash flow over the following nine consecutive quarters.

“Currently Nvidia isn’t delivering to China and we are not counting on this situation to get straightened out,” the firm concluded, further reinforcing the idea that geopolitical uncertainties continue to weigh on sales in the region.