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The Bottom Line
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Your essential guide to global business and technology
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Problems with AI’s biggest growth story | | |
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You know that something strange is going on with a stock when beating the market’s already frothy expectations counts as a disappointment. On August 28th Nvidia reported that its sales surged by 122%, year on year, in its latest quarter, to a record $30bn, and that its net income almost trebled, to nearly $17bn. Both figures beat consensus forecasts for the AI revolution’s chipmaker—but not by enough, apparently. The company’s share price fell by 6% the next day, wiping $200bn, or one Cisco, from its market value.
Undeterred, many investment banks reaffirmed their bullish outlooks for the company. The last I checked on Friday, of the 73 Wall Street analysts who track the firm (and are tracked by Bloomberg), all were still either urging their clients to buy more of its shares (65) or hold on to those they have (eight). Forget about selling any.
Still, Nvidia’s latest wobble—and an earlier bonfire that torched $900bn of shareholder value between mid-July and early August (most of which was subsequently reversed)—suggest that investors are feeling jumpy, to put it mildly.
In my debut as Schumpeter columnist this week,
I argue that they are right to be. In fact, they still aren’t feeling nearly nervous enough.
Consider Nvidia’s relationship with TSMC, the Taiwanese contract manufacturer which produces chips on its behalf. Two and a half years ago, in the early months of the AI boom, Jensen Huang, Nvidia’s boss, told me that he is not worried about capacity. His company represented just a few percent of TSMC’s sales, he said. (Yes, he was wearing his black leather jacket.) Today it probably accounts for around 11%. Judging by its purchase commitments, that share could double before long.
Yet even as their fates become more closely aligned, the two partners’ product cycles are moving further apart. Mr Huang now wants to launch a new AI chip every year, not every two, while TSMC still needs 18-24 months to build a new factory (not to mention roughly as much beforehand to plan each such $20bn investment).
What is more, without ultimate control over the number of processors it sells or the cost of production, Nvidia has only one way of ensuring that profits keep rising in line with market expectations—higher prices. The trouble is that the promise of AI will not materialise if the technology’s high cost does not start falling. Mr Huang may soon need to pick between lowering prices to support growth and keeping them high to maintain margins.
These aren’t the only tensions in Nvidia’s growth story. It is hard to see how cloud giants like Amazon, Microsoft and Google can keep generating fat profits, something markets also expect, while spending a trillion dollars in the next few years on AI data centres stacked with Nvidia chips. Or where cash-strapped electric utilities will find the money to expand their own capacity, which needs to rise if all those power-hungry chips are to run. Or why TSMC’s market value has expanded by $450bn, or around 140%, since the launch of ChatGPT, while Nvidia’s has ballooned by $2.6trn, or nearly nine-fold.
As Aswath Damodaran, a professor at NYU Stern School of Business, sums up: “There is no room in the AI story for anyone other than Nvidia.” Readers may have ideas as to how these tensions might be resolved. And if you have spotted other plot holes, let us know at
thebottomline@economist.com.
If you are an aspiring business, finance or economics writer, and would like to work for The Economist, we are inviting applications for our 2024-25 Marjorie Deane internships. Find out more
here.
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Fast fact: James Anderson, a veteran tech investor, reckons that Nvidia could potentially be worth $49trn in a decade—only a little more than the value of the entire S&P 500 index today. | | |
Your preview of next week | | |
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Monday September 2nd
The swagger has returned to Turkey’s economy. In July Moody’s raised Turkey’s credit rating for the first time in over ten years and the government returned a $5bn deposit to Saudi Arabia as foreign-exchange reserves stabilised. GDP figures for the second quarter are published. July’s inflation update is released on September 3rd.
Amid a growing backlash against tourism, Spain releases statistics on foreign visitors for July. The country hosted 42.5m tourists in the first six months of the year, up by 13% over the same period in 2023. More than 5m of them stayed in rented housing, an increase of 30%. The crowding out of locals from the rental market because of tourism is the source of much of the recent friction.
Tuesday September 3rd
GitLab reports quarterly results. The software developer’s share price has yet to recover from a drubbing in early March, when its forecast for annual revenue and profit fell below Wall Street projections. Rumours abound that the company is exploring selling itself.
Wednesday September 4th
Hewlett Packard Enterprise’s $14bn takeover of Juniper Networks was recently approved by competition regulators in Britain and the European Union. America’s Department of Justice has sought further information about the proposal. HPE should have less trouble with its acquisition of Morpheus Data, a pioneer in software for hybrid cloud-management and platform operations. The company announces its earnings.
Britain’s housebuilders are under pressure from the government to increase their construction targets, part of a plan for a huge increase in housing supply. Barratt, one of the country’s largest property developers, releases its 12-month results. It has already warned that it expects to build fewer homes over the coming year, primarily because it curbed land purchases during an industry-wide slump in demand.
Australia publishes GDP figures for the second quarter. The economy grew by just 1.1% in the first quarter, year on year, the slowest pace of expansion since the end of 2020. Earlier this year the central bank lowered its growth forecasts.
Thursday September 5th
Broadcom may say more about its rumoured collaboration with OpenAI when it presents its earnings. OpenAI has so far said it is “holding conversations” across the chipmaking industry “about increasing access to the infrastructure needed to ensure AI’s benefits are widely accessible”. Broadcom’s share price is up by 50% this year, but still below its peak in June, when it announced a ten-for-one stock split.
Rent the Runway, which also reports, turbocharged its stock earlier this year when it carried out a one-for-20 reverse stock split in order to increase the price of each share so that it could maintain its NASDAQ listing. The struggling clothing-rental company once boasted that it would “put Zara out of business”. It has turned to AI to help customers tailor their individual dress requirements to their needs, rather than taking clothing off the rack. The company hopes this will be a story of rags to niches.
Friday September 6th
July’s employment figures for America are released. The publication of June’s report helped trigger a market meltdown. The 114,000 jobs created that month were far below economists’ expectation, raising the spectre of a recession (the S&P 500 and NASDAQ stockmarket indices subsequently clawed back their losses). Since then the Bureau of Labour Statistics has revised its figures to show that there were 818,000 fewer jobs created over the past year than it had thought.
The federal judge overseeing the government’s antitrust case against Google over its search-engine business holds a hearing to discuss potential remedies. In early August Judge Amit Mehta issued a landmark ruling, finding that Google had used improper means to maintain its monopoly. Google and the Justice Department will present their ideas at the hearing about the best way forward. | | |
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The one thing that managers reliably lack is time. They will often be doing their existing jobs as well as supervising others. They have bureaucracies to navigate—expenses to authorise, hiring requests to make—and mini-crises to solve. It is all too easy for the weeks to whizz past; suddenly it is September and the northern-hemisphere nights are drawing in again. But it is possible for even harried managers to ask themselves questions that force useful moments of reflection. For example:
“Would I hire this person again?” | | | |
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