What’s News in Earnings: Should Markets Worry About an AI Bubble?

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Asa Fitch (0:34)

Hey, listeners. I'm Asa Fitch for The Wall Street Journal, and this is What's News in Earnings, our look at some of the biggest themes standing out this earnings season. Today we're talking about chips. Now, semiconductors are the computational picks and shovels, if you will, of the AI boom, and big tech companies and AI developers are buying as many of them as they can. Now, Nvidia is the leading AI chip company by far. It reported quarterly results on Wednesday that pleased a lot of investors and helped settle markets. Nvidia's stock fell again yesterday, which perhaps speaks to the volatility we've seen in the AI trade lately.

Here to help me dig into this is Wall Street Journal chips reporter, Robbie Whelan. Hi Robbie, and thanks for being here.

Robbie Whelan (1:25)

Hi, Asa.

Asa Fitch (1:26)

So we've seen some pretty interesting earnings recently from chip suppliers like Nvidia, which reported results on Wednesday. We've seen strong results and forecasts recently also from advanced micro devices, which makes AI chips. Here's what AMD CEO, Lisa Su, said on the company's earnings call earlier this month.

Lisa Su (1:46)

There's a real belief that AI compute really equates to intelligence. So if you have the chance, if you have the balance sheet, if you have the capability to put on more compute, you're going to do it because it's going to give you incremental advantage versus your competition. So it's really, I would say, an insatiable demand for AI compute.

Asa Fitch (2:09)

So what do these earnings say about the state of AI and the business of AI broadly?

Robbie Whelan (2:15)

What they say is that a lot of the fears that we're hearing about a bubble and about too much money being spent on AI infrastructure with no real plan for how to recoup that money, a lot of those concerns have been proven by this latest round of earnings to be more in the mid to long term. All signs seem to be pointing towards what really can only be described as record demand.

Asa Fitch (2:38)

Now, of course, not everything has been great recently with the AI trade in the markets. A business of AI is one thing, the markets are another. Nvidia shares were down about 10 percent between late October and Wednesday when it announced its results. A bunch of other AI link companies have fallen in recent weeks too. Why has that been happening? Is it easy to ascribe a rationale behind all those falls in stock prices?

Robbie Whelan (3:03)

One thing is that the number of people who actually buy these chips, there's just a limited market for who has the financial fire power and technical know-how to pay companies like Nvidia and AMD for their chips and for the computing power that they provide. Another thing is that the financing of a lot of the deals in the AI world right now is not very transparent. We have this word that's become a buzzword recently called circularity. What that means is that companies like AMD and Nvidia have been gravitating towards these deals where essentially what they're doing is investing in their customers, giving their customers funds that could be used, we don't know if they are being used, but could be used to buy their own products. So it's sort of like money out the door that comes back to them in the form of big orders for products. And so when the market sees this, they think, well, first of all, why do we have to do the deals these ways that are somewhat worrisome structures of the deals? But also, where is the revenue going to come from? And more importantly, when is it going to come? And so that's why we've had this real climate of uncertainty and volatility in the markets running AI recently.

Asa Fitch (4:13)

So let's take a step back and just talk about the manufacturing of AI chips. What are the earnings we've seen recently telling us about that part of it?

Robbie Whelan (4:21)

Well, the biggest companies in the space, Nvidia and AMD, don't even manufacture their own chips. They just come up with these blueprints, designs for architecture chips, and then they send them to contract manufacturers, the most notable of which is called Taiwan Semiconductor Manufacturing, TSMC. What we've been seeing recently is that pretty much every company from that side of the business is really prospering, they're really thriving. Nvidia earlier this year passed this milestone where they became the world's first $4 trillion company, and a few months later, they became the world's first $5 trillion company. The next step of the process is the manufacturing. I mentioned TSMC. Intel is a really interesting and anomalous case because Intel is one of the few companies that has both a large scale chip design business and a large scale foundry business. Their foundry business is not doing well, in part because they've missed out on several generations of manufacturing technology, ceded that market to other players, most notably TSMC. But if we're looking to Intel, we are also actually seeing a company that is growing and thriving for the first time in years when it comes to the market perspective. And that's partly because the government took a 10% stake in the company earlier this year. And so they're working very hard to get their foundry business back on its feet. It's unclear if that will happen or how soon it will happen. But they're another example of a company in the middle of the AI chip supply chain that is making moves that are being rewarded by the markets for focusing on what customers really want, which is AI chips.