The Semiconductor Behemouth Tumbles & Back To College

In Today’s (2nd) Edition of “Element, by Arsh“ -

• The “AI Darling” of Wall Street Nvidia “disappointed“ with their quarterly financial results and apparently, some investors are angry…

• The Fall 2024 semester has officially started and we are back to our “favorite“ 4 months. But, there’s a twist…

Wall Street’s AI Darling Disappoints… Are We Doomed Yet?

NVIDIA has become the poster child of this “AI Revolution” way too quickly and, being a publicly traded company, Nvidia is required by law to report how they are doing every 3 months.

Wednesday, August 28 was one such day. NVIDIA reported their results and the stock tanked over 5% before recovering to a loss of ~4%. If this were any other stock, the world wouldn’t have taken much notice, but with Nvidia, people started anticipating a doomsday instantly. Here’s why that’s obviously a flawed way to look at it.

Firstly, here’s what the company actually reported. Their revenue in the last 3 months more than doubled to $30.04 Billion from the same time last quarter. The Earnings Per Share (which is a measure of a company’s profitability) was $0.68. Nvidia is divided into 24.62 Billion shares. So, when you multiply the earnings per share (EPS) by the number of shares, you get the “profit” the company made!

These weren’t bad numbers to report but the stock still dropped 5%. So, what’s the reason?

Blackwell. For some time now, Nvidia has been developing the generation of chips, and they call it “Blackwell”. Analysts on Wall Street were expecting that Nvidia will start shipping out these new chips in October. It turns out that everyone today wants semiconductor chips, so the manufacturers are swamped and the delivery of Blackwell chips will be delayed. And investors did not like this and sold off some stock :(

Future Uncertain? Every hardware has had production delays at least once in its history and they often go unnoticed, simply because they were not Nvidia. I often cringe when people call Nvidia “the most important stock in the world“, and that is probably just because it’s not true (and it sounds too cheesy 😅). So, I like to think that this is simply a part of a company’s life, and there’s nothing much we can do about it, but I can assure you that is not the only thing on top of investors’ minds right now.

Another concern people are trying to disregard is the prospects of actual sales a few years from now. Currently, Nvidia's biggest customers are Meta, Amazon, Microsoft, and other big tech companies. While it looks like this demand is unending, naturally, it has a saturation point. That’s problem number one. To counter this, people often say, “Other smaller companies will buy it”. But, I don’t think that will be a reality.

Companies like Amazon and Microsoft are buying these chips to build/enhance their cloud platforms (Azure, AWS, etc.) and to include new features for smaller companies to take advantage of. If you believe in the future of cloud computing at all, you would agree that a situation where a lot of AI-related work for a medium-to-large business is being done using one of Big Tech’s cloud platforms is not far from reality. If this happens, Nvidia will first see slowing demand from the big tech companies and will eventually have more supply than demand, which will cause at least a minor panic.

Problem number two is pricing. I suspect that Nvidia will need to start lowering the costs of its GPUs, and that will happen because of two things - Slowing demand & rising competition! Let me explain.

I mentioned about slowing demand in an earlier paragraph. But, I wanted to re-iterate that with a more concrete example. Over the past few months, too many CEOs have said that they are “overspending“on GPUs right now because the cost of under-spending and letting their customers struggle (with less advanced technology) is too much. Statements like these directly indicate that spending on AI chips will slow down eventually. This will increase the supply and decrease demand, leading to a reduction in prices (hence reducing gross margins)!

This brings me to my next reason, rising competition. Reports have circulated which say that Google is building its own GPUs and AI chips rather than buying a lot from companies like Nvidia, which reduces some revenue for the company. But, that is not a major problem because Google is not in the business of selling GPUs to others, but there are companies in the market that are selling GPUs for a lot cheaper than Nvidia. Sure, these chips are not as good as those made by Nvidia, but they get the job done, and when wait times for some of the GPUs are over 2 years, I don’t think companies are waiting too long for specific Nvidia GPUs to start implementing AI in their businesses.

Those were my thoughts on where Nvidia is going in the next few years, but I would love to know your thoughts on this or your thoughts on AI. Literally, all of you reading this know me from somewhere, so you can text me your thoughts too :)

Going back to college feels “yucky“, but it gets soooo much better with friends around you…

I didn’t realize just how short a summer break can be, and I made it even shorter by just sleeping through it (Obviously, not very productive). Unfortunately, I also did not click a singular picture of the campus these last couple of days, so I promise a nice campus picture next week. (The image above is approximately what I saw from my class on Wednesday 😅 )

Coming back to more pressing things to discuss, I have to confess that I was absolutely devastated about going back to campus. All I could think about was the fact that I had way too many classes and I would have to study way too much to even be on par with the class and not lag and give up. And, that is the mood I traveled with during that 1.5 hour commute back to the campus on the first day of classes. While not instantly, I started meeting the friends I had made during my first two semesters (the ones that I hadn’t talked to in a while), and suddenly the whole experience got a lot less nerve-wracking and seemed manageable. I was able to actually learn things in class now that the unreasonable and unnecessary pressure to do a giant task alone was gone!

This is one of the only times I have experienced, “Humans are a social species“ in action where the results were so profound and quick. This does not mean I have lost my ambition to do well this semester. I do have some goals and side-quests I want to achieve, but having people around to share the wins and losses with is a feeling that just makes you want to believe that you can do so much more than you thought you could. A detailed story about goals and side-quests will come about 15 weeks from now.

Until the next time, see ya 😃 

Thank you to all 42 of you for believing in me and I hope to see all of you (and hopefully more) in the next one. Send it to a friend who you think will like something like this. 🙂