Why the AI spending boom won’t end up like the 1990s tech bubble

Nvidia stock (NVDA) hit fresh all-time highs on Thursday morning with another robust quarterly earnings report pushing the stock’s yearly gains to roughly 230%.

This meteoric rise, however, won’t meet an end like what befell the network buildout plays that floundered after the tech boom of the 1990s, according to some on Wall Street.

“Today, we think there are many examples of companies that are generating a return using generative AI through product enhancements, productivity gains, or outright cost reductions,” Jefferies equity analyst Mark Lipacis wrote in a note to clients on Thursday.

In contrast, the 1990s saw companies invest into a Field of Dreams-esque “build it and they will come” hope, Lipacis argued. Today, AI is actually changing business outlooks.

“Demand for our Data Center platform for AI is tremendous and broad-based across industries and customers,” Nvidia Founder & CEO Jensen Huang said Wednesday.

“Our demand visibility extends into next year. Our supply over the next several quarters will continue to ramp, as we lower cycle times and work with our supply partners to add capacity.”

NVIDIA CEO Jen-Hsun Huang delivers a speech about AI and gaming during the Computex Taipei exhibition at the world trade center in Taipei, Taiwan, Tuesday, May 30, 2017. (AP Photo/Chiang Ying-ying)

NVIDIA CEO Jen-Hsun Huang delivers a speech about AI and gaming during the Computex Taipei exhibition at the world trade center in Taipei, Taiwan, Tuesday, May 30, 2017. (AP Photo/Chiang Ying-ying)

Second quarter revenue for Nvidia totaled $13.51 billion, a 101% jump from last year and well above Wall Street’s expectations for $11.04 billion.

In the 1990s, companies like Cisco (CSCO), Oracle (ORCL), and Intel (INTC) saw their share prices soar as exuberance mounted around the prospects for the chipmakers.

The New York Times even called Cisco a “bellwether” for the stock market in 2000. But less than a year later, the company cited a macroeconomic slowdown as it cut jobs and profits swung to losses.

Thomas Russell, then an associate professor of economics at Santa Clara University, told The Times in 2001 the slowdown at Cisco was a “wake up call” for the semiconductor industry, noting the roles that Cisco played in the economy moving forward hadn’t changed.

All three stocks would fall about 80% as the Dotcom bubble popped.

In July, BlackRock’s CIO for global fundamental equities Tony DeSpirito described demand as “really real” at a media roundtable and said the earnings growth from AI is “just coming.”

Indicators that demand is outpacing Nvidia’s supply have been abound on earnings calls this quarter.

In July, Tesla (TSLA) CEO Elon Musk said the company would “take Nvidia hardware as fas as Nvidia will deliver it to us.”

During recent earnings calls, big tech giants Amazon (AMZN) and Alphabet (GOOGL) also noted that Nvidia GPUs are powering some AI projects at their respective companies. Meta said generative AI is holding users on the app longer and driving additional revenue.

“Although we recognize emerging competition from the large cloud service providers (i.e. captive/internal solutions) as well as other merchant semiconductor suppliers,” Goldman Sachs managing director Toshiya Hari wrote in a research note on Thursday, “we expect Nvidia to maintain its status as the accelerated computing industry standard for the foreseeable future given its competitive moat and the urgency with which customers are developing/deploying increasingly complex AI models.”

Huang estimates there are about $1 trillion worth of data centers installed in the cloud and enterprise software systems. Capital spend in those industries is shifting to building out accelerated computing and generative AI capabilities, he said, but that spend is about $250 billion, indicating the transition is far from over.

“This is not a near-term thing,” Juang said. “This is a long-term industry transition, and we’re seeing these two platform shifts happening at the same time.”

Josh Schafer is a reporter for Yahoo Finance.

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