- Nvidia results beat earnings expectations for ninth quarter in a row – but that didn’t stop its share price falling
- Too early to see any impact of DeepSeek on order flow
- There is a risk the AI rally will pause for breath as competition catches up and more users weigh up costs
- Keep a watching eye on Nvidia’s rising trade receivables
“We are at a major turning point in the Nvidia story,” says Dan Coatsworth, investment analyst at AJ Bell.
“There is a natural evolution in the world of business when you have a runaway success story – others will try to do things cheaper and users will have more choice. Companies are queuing up to have a bite of the cherry and Nvidia is no longer going to enjoy the AI-related feast on its own.
“Big tech firms which might have previously been Nvidia’s key customers are starting to develop their own chips. Meanwhile Nvidia’s established rivals continue to make enhancements to their own chip range. We’ve also had China’s DeepSeek appear out of nowhere and show to the world that it is possible to run AI models for less money. These factors have completely changed the narrative in the board room towards choice and cost.
“There are already hints of a shift in the market dynamic with chatter that Microsoft has been pausing construction on certain data centres. The bull case for AI is well understood, yet as with all ‘next big thing’ situations, expectations often get ahead of themselves and there is a pullback or pause along the way.
“DeepSeek earlier this year had a major breakthrough with a lower-cost AI model than offered by the likes of OpenAI or which big tech firms have been creating themselves. However, the knock-on effect to Nvidia in potentially hurting orders for its chips to help support AI developments was never going to be reflected in its numbers because DeepSeek only appeared on the scene a few weeks ago.
“The key thing to watch going forward is whether DeepSeek’s appearance now delays the decision-making process on anything to do with AI. There is a real risk that Nvidia’s growth starts to slow and that could hurt its share price big time.
“The prospect of being able run AI services more cheaply, together with growing uncertainties around the economic outlook, mean companies will be paying more attention to tech-related spending. Previously, everyone turned to Nvidia, believing it to be the only player in town for chips that help process large amounts of information. That is no longer the case. Time is running out on its competitive advantage and that explains why its share price has lost momentum.
“It’s telling that Nvidia’s latest set of results beat earnings expectations for the ninth quarter in a row and failed to win over the market. Investors have a growing list of reasons why Nvidia’s success story could hit a stumbling block and that makes them less willing to keep buying the shares at the current price.
“There are other areas to consider in the results too, including a big growth in trade receivables to $23.1 billion in Q4 versus $10 billion a year earlier. This is money owed to Nvidia by its customers following the sale of goods and services on credit.
“Offering credit isn’t unusual, particularly as Nvidia’s products aren’t exactly cheap. However, investors with long memories might remember how Cisco and some internet equipment giants provided so-called vendor financing in the late 1990s and how that helped to boost near-term demand but exacerbated the slowdown that followed as an investment boom turned to bust.
“At face value, Nvidia is clearly enjoying a purple patch given that sales and earnings continue to grow strongly and the AI theme remains intact. But more investors are going to be asking if all the easy money has now been made on the shares. You will need to have been hiding under a rock to not know about the AI opportunity, so will there still be a large queue of people wanting to buy now, when Nvidia’s shares have already risen by 800% since the start of 2023?”
