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

Starting point is 00:00:00 Hey listeners, I'm Asa Fitch for the Wall Street Journal, and this is What's News and 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. InVidia stock fell again yesterday, which perhaps speaks to the volatility we've seen in the AI trade lately.

Starting point is 00:00:48 Here to help me dig into this is Wall Street Journal Chips reporter Robbie Whelan. Hi, Robbie, and thanks for being here. Hi, Lisa. 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 microdevices, which makes AI chips. Here's what AMD CEO Lisa Sue said on the company's earnings call earlier this month. There's a real belief that AI compute really equates to intelligence. So if you have the chance, if you have the balance

Starting point is 00:01:24 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. So what do these earnings say about the state of AI and the business of AI broadly? 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.

Starting point is 00:02:03 All signs seem to be pointing towards what really can only be described as record demand. 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. Invidia shares were down about 10% between late October and Wednesday when it announced results. A bunch of other AI-linked 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?

Starting point is 00:02:32 One thing is that the number of people who actually buy these chips, there's just a limited market for who has the financial firepower 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.

Starting point is 00:03:00 What that means is that companies like AMD and Invidia 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

Starting point is 00:03:37 had this real climate of uncertainty and volatility in the markets surrounding AI recently. 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? Well, the biggest companies in the space, VD, don't even manufacture their own chips. They just come up with these blue prints, designs for architecture chips, and then they send them to contract manufacturers, the most notable of which is called Taiwan Semiconductor manufacturing TSM. What we've been seeing recently is that pretty much every company from that side of the business is really prospering.

Starting point is 00:04:17 They're really thriving. Invidia 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 TSM. 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.

Starting point is 00:04:40 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 TSM. 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

Starting point is 00:05:15 chain that is making moves that are being rewarded by the markets for focusing on what customers really want, which is AI chips. What about the companies that are on the other end of this transaction buying these chips? The customers that we're talking about, so the Microsofts, the Googles, the Open AIs of the world, Anthropic, all these new companies and old established big tech companies, they're the weak link in this process. And the reason for that is because all the products they're designing,

Starting point is 00:05:48 Jamini, Claude, OpenA.I. Are generally speaking, not making much money, if any, at this point. We're still a long way off from the world where Open AI is taking those hundreds of millions of users they have and turning that into sort of meaningful, repeating income. And that's one of the main things that kind of worries the markets because we're in this mode where it's spend, spend, spend, but we don't have the money coming in the door from the sales or subscriptions to AI products that we need in order to make that spending make sense. Isn't this kind of concerning? I mean, look at the numbers, and they're pretty stark, right? InVIDIA just reported its latest quarter, it made $57 billion of revenue. That's a lot of money.

Starting point is 00:06:32 On the other side of that transaction, one of the biggest customers, Nvidia chips is Open AI, which it's losing about $50 billion a year. And they're the ones paying for these chips. And you have, interestingly, seen Jensen Wong begin talking a little bit about an AI bubble. In an earnings call on Wednesday, he addressed some of the bubble fears. Let's hear what he said. There's been a lot of talk about an AI bubble. From our vantage point, we see something very different.

Starting point is 00:07:02 So Jensen Huang is talking about an AI bubble that he thinks is not really a bubble. But what would you be looking for as an indication going forward that, okay, we're in a bubble or maybe not? Well, one thing that I am particularly interested in is there's a whole ecosystem of middlemen in the AI world. There's one in particular that I have my eye on called CoreWeave, we just lost about 40% of its market value in the last month or so. Investors are so willing and ready to throw money at companies, any company that's in AI at all. And then when you have like the littlest disruption to that business model can cause just like huge amounts of disjunction. So that's the kind of thing I'm watching, this heightened volatility. How do investors react to seemingly small disruptions to various businesses?

Starting point is 00:07:53 Those are all great points. Thanks for joining us here. Thanks, Haysa. And that was What's News and Earnings. Today's show was produced by Zoe Koken and Anthony Bansy with Deputy Editor Chris Zinsley. Additional sound, courtesy of S&P Global Market Intelligence. Later today, we'll have the PM edition of What's News out for you as usual. Until then, I'm Asa Fitch. Have a great day.

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

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