Incredible earnings, great guidance, expansion into the CPU side of ai to continue capturing a large chunk of the ai chip market. So what is the problem? Well, it’s two things.
Inventory levels are way up. Like waaay up. This is partly due to the value of things being stored / currently under production rising. But it is also a growing warning sign of supply catching up to demand. Not because demand is slowing organically right now, but because the globe is not producing enough usable locations to deploy their products. Supply is vastly outpacing datacenter rollout. This is a problem.
The power usage of Vera Rubin is absolutely insane, especially the ultra. The globe cannot keep up with the current demand for datacenters at their current power usage levels, let alone these increased usage levels. That is going to slow the rollout of datacenters substantially.
So you have a company at the forefront of the ai buildout producing as much as they possibly can, expanding production as fast as they can, charging customers nosebleed levels for their products thanks to the massive demand. And we have dwindling locations to deploy said products. What do you think happens when the other mega caps take their foot off the gas because they have no where else to deploy this insanely expensive ai hardware? The demand will drop. Prices will drop. Models will become more efficient. And the companies benefitting from this infinite demand cycle will take a big hit to their profitability and growth.
This will come to pass. When? Whenever the mega caps decide to back off on their capex expansion. After the midterms this year is my assumption. They keep the party going to keep the market / stocks like NVDA inflated to help the administration’s chances of winning, and in turn they do not get regulated at all. They are all very aware of what will happen when they do start to lower capex. The ai trade will get hit, and hit hard. Markets will panic. Memory prices will fall. What makes this all so different from other bubbles is this one has an on/off switch. And you won’t know when it will get flicked off, it will just happen.
This does not mean the ai trade ends, or ai fails, or NVDA goes under lol. It means demand drops off to levels that match what is deployable, and datacenter construction / power plant construction booms (until ai efficiency gains or profitability concerns reduce the need for more datacenters). However this does mean that NVDA and many of its competitors will be repriced to reflect the reduced profitability of their products, which will likely hurt their market values a fair bit.
So what did I miss? Why am I wrong here about NVDA and the broader ai trade?