Nvidia - Room to run
In the near term, the bull-bear debate favors the bulls.
Following a year of mixed performance, Nvidia’s stock surged to an all time high this past week. With many of the factors fueling investor concerns largely diminished for now, the stock has room to run in the near term.
China-sourced revenue had been a key concern weighing on Nvidia’s stock, prompting the market to implicitly assign a lower multiple to earnings tied to China and driving much of the stock’s prior valuation compression. However, with this risk now reduced, investor focus is shifting back to Nvidia’s dominant market position, the growth tailwinds from the Blackwell product ramp, and its relative valuation, trading at a discount to large-cap semiconductor peers like Broadcom and Texas Instruments.
This opportunity comes amid an environment of revived animal spirits in the stock market and stretched valuations. Even so, demand for AI compute infrastructure remains robust, and semiconductor upturns (and cyclical downturns) often last longer than expected.
Prior to Nvidia reaching an all-time high, the AI trade has been alive and well, as demonstrated by the recent strong performance of stocks like AMD and CoreWeave. AMD’s rally has been fueled by growing optimism and anticipation around the company’s 2026 prospects, as customers look to counter Nvidia’s near-monopoly and support a second-source merchant AI chip supplier. This comes as Nvidia continues to dominate the market, capturing the vast majority of AI derived earnings with its expected total gross profit of nearly $140 billion this fiscal year.
In contrast, CoreWeave’s strong stock performance after its first earnings report reflects both speculative enthusiasm for AI plays and technical factors like a small free float and high short interest. However, concerns about its business model raised at the time of the IPO remain valid, as the company’s capital structure and rising debt load leave it vulnerable. If demand growth slows, competition intensifies, or service pricing declines intensify, CoreWeave’s business economics could unravel quickly. In the near term, the upcoming expiration of its IPO lockup period will add more shares to the market, as some pre-IPO investors are likely to monetize holdings at the current elevated valuation.
Against this backdrop, and considering the recent performance of other, less attractive AI stocks, Nvidia stands out with its dominant market position, superior earnings quality, and durable competitive advantages.
Risks Ease as AI Demand Remains Strong
Over the past year, Nvidia’s stock has faced three primary concerns: risks tied to China-sourced revenue, slowing estimate revisions, and fears of cyclical overinvestment in AI compute capacity leading to oversupply. Currently, these risks have largely eased, with evidence pointing to a more constructive near term fundamental backdrop.
Better Estimate Trends: A key factor previously impacting Nvidia’s share price was the slowdown in the pace of positive estimate revisions. This underlying trend effectively reversed with the company’s late-May earnings report. Although July quarter revenue guidance was roughly in line with expectations, management highlighted that revenue would have been $8 billion higher without lost China sales, underscoring strong demand elsewhere.
At the same time, capex guidance from major cloud providers continues to trend higher, reflecting hyperscalers’ commitment to sustained, aggressive investment in AI. The recent uptick in the war for AI talent illustrated by Meta’s stepped up recruiting efforts further underscores the determination of major AI players to keep investing in ways that should support continued demand for AI compute infrastructure. Additionally, announcements made during President Trump’s recent trip to Saudi Arabia and the Gulf states have renewed focus on these regions as potential sources of strategic sovereign AI demand, investments likely to proceed regardless of cyclical conditions or shifts in the AI compute supply-demand balance.
China Overhang Removed: Until recently, China sourced revenue both direct and indirect via Singapore as a transshipment hub, together accounted for 31% of FY25 revenue and was Nvidia’s most tangible risk. But this overhang has mostly cleared. Last quarter, following the imposition of new export restrictions, Nvidia took a $4.5 billion charge related to H20 inventory and purchase commitments, below the up to $5.5 billion figure announced in April. The company will now exclude China from forward revenue and earnings guidance, removing this uncertainty from estimates.
Additionally, while the Biden administration’s prior Framework for the Diffusion of Advanced Artificial Intelligence aimed to cut off China’s access to advanced GPUs and could have potentially impacted Nvidia’s indirect sales to China, the Department of Commerce rescinded these controls in May, effectively lifting this China related revenue overhang. Although the Trump administration has yet to propose a replacement, signals suggest that access to AI systems may be used as a bargaining chip in foreign policy and trade negotiations, a potentially net positive for demand compared to expectations of the impact under the Biden administration’s policy framework.
AI Compute Capacity Digestion Risk: A cyclical correction in demand from AI compute supply growth outpacing demand isn’t a question of if, but when. However, current evidence suggests such a risk is not imminent, and may still be well into the future. Assessing sustainable AI systems demand growth is challenging, as capacity expands not only through new data center builds but also through efficiency gains in model design, system optimization, and GPU utilization. Algorithmic advances further reduce compute requirements, potentially accelerating AI adoption but clouding near term GPU demand signals.
While these efficiency gains are positive for Nvidia in the long run, they introduce timing risks: transitioning from training-heavy demand to inference-led workloads may not happen smoothly, creating oversupply if buildouts outpace realized demand. Compounding this risk, a notable share of GPU demand is coming from neocloud players, former crypto miners, small cloud operators, and VC-backed startups many of whom are building capacity ahead of solid customer pipelines. This speculative expansion, fueled by equity and debt financing often collateralized by GPUs, leaves them vulnerable if demand falls short, which could in turn curtail future GPU orders.
Additionally, a meaningful portion of AI data center customer demand comes from high cash-burn, AI startups rather than mature enterprises, raising questions about the sustainability of current growth levels. Nvidia CEO Jensen Huang acknowledged this dynamic on the August 2024 earnings call, noting: “the number of generative AI startups is generating tens of billions of dollars of cloud renting opportunities for our cloud partners.”
Signals to Watch
Current industry demand for AI infrastructure remains strong, providing a supportive backdrop for Nvidia and other key players. Looking forward, the resilience of AI demand growth, especially from less established sources of demand like neocloud players and VC backed startups, will be important in determining whether Nvidia can sustain its current growth trajectory or face a cyclical downturn if AI compute supply persistently outpaces profitable demand. Monitoring cloud and neocloud capex trends, along with signs of sustainable revenue pipelines versus speculative overbuilding, and the pace of adoption for inference workloads will be essential for assessing the durability of AI demand growth.
In this context, tracking GPU compute capacity spot pricing will provide early warnings of oversupply. A rapid shift in demand toward Nvidia’s Blackwell generation chips could leave existing AI compute capacity underutilized, pressuring pricing and eroding returns on recently built out infrastructure. Lower utilization rates could also constrain the cash generation needed by neoclouds and other buyers to fund future capex and ongoing procurement of Nvidia systems. Together, these indicators will be essential for assessing whether Nvidia’s growth trajectory remains on track.