Blockbuster Nvidia Earnings Report Cools Growing Concerns of AI Bubble

The artificial intelligence market seems to have received new life after the latest earnings report from Nvidia, but concerns of a bubble remain prominent.

Across the last several days, concerns over a growing AI bubble had slowly continued to grow, bringing tech stocks lower and lower as a sense of impending doom began to set in for some investors.

A bubble occurs when a certain stock or market becomes overhyped, leading to investment in the stock beyond its true worth. As more people jump onto this train, the stock balloons before plummeting in value once the bubble "pops" and investors realize the true value of the stock.

In the case of Nvidia, the company has risen to the position of most valuable company within a few years– an incredible accomplishment. The company is now valued at around $4.75 trillion, but signs of a bubble lingered.

Circular investing has also begun taking place– one of the most crucial signs of a bubble. This occurs when two companies invest in each other, leading to inflation of the companies' real value. For example, Nvidia made a recent deal with another major AI firm– Nvidia announced that they would invest over $100 billion in OpenAI, the creator of ChatGPT, boosting both corporations' stocks.

Meanwhile, OpenAI continues to purchase Nvidia chips, circulating that money back to Nvidia. The purchase made by OpenAI was made using Nvidia's own money, but it counts as revenue for Nvidia. This practice can often be used to defraud investors in major economic schemes, but it is also a sign of a growing bubble.

Additionally, Nvidia's P/S ratio is a staggering 28. P/S, or price-to-sales, is a ratio that describes a company's market capitalization divided by its revenue, with a higher number usually indicating overvaluation. The average P/S ratio for average companies is between 1 and 2, with some tech stocks averaging around 3 because of the quickly-growing nature of the market. With a P/S of 28, Nvidia appears to be extremely overvalued.

Nevertheless, Jensen Huang, the CEO, and many investors remain bullish on the stock. Nvidia's latest earnings report was set to define the nature of the AI bubble, as the bubble usually "pops" when a company is not able to meet demands after overvaluation, but Nvidia smashed all expectations.

Revenue beat estimates by around 3.5%, reaching $57 billion for the quarter, and profit soared over 65% from last year to $31.9 billion. The company also predicted a stellar Q4 ahead, with Huang emphasizing that demand for their latest Blackwell chip is "off the charts." The company's stock rose by over 5% in after-hours trading.

This latest earnings report significantly cooled Wall Street fears of an incoming bubble, and the possibility that Nvidia continues to meet demand is completely feasible. Its performance in future earnings reports will likely determine the nature of the entire AI market and possibly even a majority of the tech sector, but Huang and other investors remain confident that AI will continue to boom for the next few years.

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