AI Tipping Point: Nvidia CEO Sees Transformation Amid Market Scrutiny

Nvidia Chief Executive Officer Jensen Huang stated he does not see an artificial intelligence (AI) bubble, but rather a "tipping point" for the technology. Huang believes his company's computing specialisation will soon integrate into everything from coding to robot operation, fueling investor optimism.

Credit: NVIDIA

Nvidia shares rose over 5% in early trading following the comments. The chip giant recently released results and forecasts that surpassed expectations, easing immediate financial worries.

Despite this, some market observers express concern that Nvidia's growth could face constraints beyond its control. The company is now valued at more than USD 4.5 trillion.

Credit: NVIDIA

A regulatory filing revealed that the majority of Nvidia’s rapidly growing business relies on four unnamed customers. In the third quarter, these four customers accounted for 61% of its USD 57 billion revenue, an increase from 56% in the previous quarter.

Past announcements suggest these major customers may include Microsoft, Meta, and Oracle. Nvidia also doubled the amount it spends renting its own chips back from cloud customers, reaching USD 26 billion from USD 12.6 billion in the second quarter. These rental contracts extend to at least 2031.

The company further disclosed investments of up to USD 100 billion in OpenAI and USD 10 billion in Anthropic, both significant customers. The high reliance on a few entangled customers and the circular nature of some deals have raised concerns, particularly as none of the entities have yet reported substantial AI profits.

Chaim Siegel, an analyst at research firm Elazar Advisors, commented, "A lot of this growth is coming from loss-making startups or loss-making projects, so most likely the cycle ends badly unless all these companies agree to stop spending together and let profits shine through, which is a near impossibility."

Huang addressed bubble discussions during an earnings call, asserting Nvidia perceives a "very different" scenario. He outlined three transitions critical to Nvidia’s continued dominance in the coming years.

The first transition involves moving non-AI software, such as engineering simulations and data science, from traditional central processors to Nvidia’s high-powered chipsets. Secondly, entirely new categories of software, like coding assistants, are being invented.

Lastly, Huang envisions AI evolving from virtual applications, such as chatbots, into the physical world of cars, robots, and other automated systems. He stated that Nvidia’s "singular architecture enables all three transitions," contributing to infrastructure growth.

However, even some Nvidia supporters, such as Ivana Delevska, chief investment officer of Spear Invest, expressed concern over the vast land and power required for data centres to realise this vision. Spear Invest holds Nvidia shares in an actively managed exchange-traded fund.

Huang affirmed Nvidia is diligently working to ensure factors beyond the chip supply chain do not impede its progress. He cited established partnerships in land, power, data centre buildings, and financing as solutions to these "tractable" issues.

Despite these assurances, some analysts suggest that Nvidia's market dominance is not guaranteed, especially as companies like Google parent Alphabet and Amazon develop their own AI chips for a similar customer base.

Jay Goldberg, a senior analyst at Seaport Research Partners, which holds a "sell" rating on Nvidia, noted, "They have said they are sold out for the year and probably next, which leads me to wonder what possible upside surprises they could offer." Goldberg concluded, "The list of things that could go wrong for Nvidia is longer than the list of things that could go right."

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• Nvidia Chief Executive Officer Jensen Huang dismissed AI bubble concerns, viewing the current market as a "tipping point."

• Nvidia's financial disclosures show significant revenue concentration from four unnamed customers, accounting for 61% of its third-quarter revenue.

• The company has increased its spending on renting back chips from cloud customers to USD 26 billion and made substantial investments in OpenAI and Anthropic.

Source: REUTERS