The AI bubble may be about to burst and no one will be immune from the financial fallout, writes RUTH SUNDERLAND as Nvidia shares plunge

For most people, listening to a CEO present a company report on its quarterly results is not exactly a great party.

Except when it comes to Nvidia, the American computer chip designer also known as the most important stock on planet Earth.

This accolade is no small feat for a company with a nearly unpronounceable name, created by a man who once worked as a dishwasher in a fast food restaurant.

(If you have trouble pronouncing Nvidia out loud, apparently you should say en-VID-ia, not NER-vid-ia. It’s based on the Latin word invidia, meaning envy, and was chosen because founder Jensen Huang believed his company would be so brilliant that it would inspire that emotion in competitors.)

Back to that party. It was organized in Manhattan by a young woman named Lauren Balik, who took over a bar and invited her fellow Nvidia nerds to watch Huang present the results on TV.

As Huang addressed his shareholders, bubbles and balloons floated around the room.

These weren’t just standard party props, but symbols of the debate surrounding Nvidia.

Sceptics believe it is at the center of a massive technology bubble about to burst.

The party turned out not to be a big party.

Nvidia’s market cap fell by $100 billion following the results, which, while excellent by most standards, fell short of sky-high expectations.

Whether they realise it or not, small investors in the UK are heavily exposed to the fortunes of Nvidia.

Some have bought the shares outright. Others have invested in funds that hold the shares, such as Blue Whale Growth and the Scottish Mortgage Investment Trust.

However, no one is immune to the Nvidia effect.

It is at the heart of the artificial intelligence (AI) frenzy sweeping Wall Street and the City.

Since AI is at the forefront of AI and has a valuation of around $3 trillion, stock price fluctuations impact the markets as a whole and therefore our savings and pensions.

It could be argued that its results have become as important, if not more important, than major economic announcements by the British or US governments, or by major central banks.

The question on everyone’s lips after the recent sharp decline is whether Nvidia’s meteoric rise will come to an abrupt halt.

There are certainly signs that enthusiasm for the company is overblown.

Revenues rose 122 percent from the previous year to $30 billion, beating its own forecasts.

In a normal world, that would be seen as a great achievement.

But on planet Nvidia, expectations were so high that these numbers were seen as an anticlimax.

Stock prices are of course about the future, not the past. They give an indication of what investors think the prospects of a company are.

“Investors increasingly want more from Nvidia,” says Dan Coatsworth of investment platform AJ Bell.

‘Despite the company’s best efforts to refocus attention on the opportunities around AI, it wasn’t enough to prevent a share price decline.’

To put that sell-off in perspective, shares are up nearly 150 percent over the past year.

The company has many fans who seem very optimistic about the recent setback and see it as a minor matter.

Fund manager Stephen Yiu, who has invested 10 percent of his Blue Whale Growth fund in Nvidia, told investment website Citywire the results were “a non-event.”

“We believe that nothing has changed in Jensen Huang’s reassurance that 2025 will be an important year for the data center business,” he said.

Nvidia’s rise to the status it has achieved today has been astonishing.

The company first listed on the public market on the eve of the millennium and has since grown into the success story of the 21st century.

Over the past five years, shares have risen nearly 2,800 percent.

The reason Yiu and others joined Nvidia can be summed up in two words: artificial intelligence (AI).

The company, which focused on video games in its early years, now makes graphics processing units (GPUs): wafer-thin printed circuit boards with a powerful microchip at their core.

Nvidia’s GPUs can be found in smart cars, robots, and data centers. Importantly, they’re behind OpenAI’s ChatGPT chatbot.

The company is far ahead of competing chip designers and manufacturers such as Advanced Micro Devices and Intel.

One reason for the cool reception to the numbers is concerns about delays and additional costs associated with the new Blackwell AI chips.

These chips are a follow-up to the current generation of chips known as Hopper.

Huang tried to allay concerns about the Blackwell chip, but the drop in stock prices suggests he has not entirely succeeded.

“The functionality of Blackwell is great, we’re testing it all over the world,” he said in an interview with Bloomberg TV.

He added that Nvidia has started mass production and will start shipping the chips to customers in the fourth quarter of this year.

“We will have billions of dollars in Blackwell revenue,” he said, adding that they are “much more energy efficient” than previous generations.

“We are one of the fastest growing technology companies in history,” he said.

That’s undoubtedly true, but it’s also becoming increasingly difficult for Nvidia to keep up.

According to Dan Coatsworth, this has “raised alarm bells that the AI ​​gravy train may be losing steam.”

Nvidia fans believe there is still plenty of potential. Companies increasingly need more processing power, more storage and more power to perform more complex tasks with AI.

“We are also going to have a great year next year,” Huang said.

He pointed to the opportunities Nvidia can leverage for ‘Sovereign AI’ as countries including Japan, India, Canada and the United Kingdom look to expand their AI infrastructure to boost their economies.

“A country’s digital data is part of their natural resource, like oil,” he said. “They want to harvest it and turn it into their digital intelligence,” he said.

But as Ben Barringer, technical analyst at broker Quilter Cheviot, notes: ‘Nvidia has grown to a point where there is little room for error. Any sign of a slowdown or normalisation in growth will have an outsized effect on the share price.’

The general consensus is that Nvidia shares are “perfectly priced” and that even the slightest change in the halo would send them plummeting.

Some in the City and on Wall Street are responding: Who cares?

John Higgins, chief market economist at Capital Economics, said: ‘What does it matter that Nvidia has a price for perfection? It doesn’t mean the party is over or the AI ​​bubble has burst.’

True believers argue that Nvidia has a huge advantage over its competitors because it is currently the only company that can produce GPUs that power AI.

But a lot can still go wrong. To state the obvious: Nvidia’s future depends on the widespread adoption of AI, so if that doesn’t go as expected, it could have dire consequences.

Even if that were true, Nvidia could face challenges to its dominant position from competitors and regulators. The U.S. Department of Justice is investigating complaints from rivals alleging anticompetitive behavior.

The company is also vulnerable to supply chain disruptions: its advanced AI chips are produced in Taiwan, which is under threat from aggressive Beijing.

AI will consume vast amounts of energy, which will be difficult to supply and likely to anger environmentalists.

Underpinning Nvidia’s rise is a near-universal belief in the marketplace and business community that generative AI, capable of creating high-value content, will transform businesses, industries, and entire societies.

But what if that isn’t the case?

According to investment bank Goldman Sachs, companies will spend $1 trillion on chips, data centers and other AI infrastructure in the coming years.

Some Goldman experts question whether those massive spending efforts will ever pay off.

Jim Covello, head of global equity research, says it is “certainly questionable” whether AI will ever “deliver on the promise that many people are excited about today”.

‘The point that is less discussed is that AI technology is exceptionally expensive. To justify that cost, AI needs to be able to solve complex problems that it was not designed to solve.’

He adds: ‘Many people seem to believe that AI will be the most important technological invention of their lifetime, but I disagree, given the extent to which the internet, mobile phones and laptops have fundamentally changed our daily lives.’

Covello says he struggles to believe that AI will ever acquire the cognitive reasoning to replace human interactions. Humans add the most value to complex tasks, he argues, because we understand nuances in a way that a computer never can.

A comforting thought in the human versus machine debate, but what does this mean for investors?

Even arch-skeptic Covello thinks AI spending will continue, despite his skepticism.

For now, he said, investors should stay in Nvidia, and in utilities and other companies involved in expanding electricity grids, which are needed to provide the massive amounts of energy needed to run AI technology.

Nvidia’s stock price, and the AI ​​gold rush in general, may be starting to feel like a bubble. And that party in Manhattan is the kind of event that has cautious investors looking for safer havens.

But for now, let’s give Jim Covello the last word. “One of the most important lessons I’ve learned over the last three decades is that bubbles can take a long time to burst.”