They say the markets discount the obvious, what we already know. There is no debate or ambiguity that Nvidia is “crushing it” now and has been crushing it for the last few years, becoming the critical nerve center. Their profit margins are spectacular and the company is the clear marketing leader in the AI wave. The stock is up over 2000 percent over the last five years and almost 400 percent over the last two years. Why not just keep buying and everyone gets rich right?
Here is the problem. The companies buying the chips and renting the Nvidia data centers don’t make any profits on AI. If you look beyond the obvious that everyone and their mama knows, none of the hyperscalers (Alphabet, Microsoft, Meta, Oracle, Amazon, etc.) make any money on their massive AI spending. The massive spending is a speculation prayer that the profits will develop at the other end of the rainbow. If you are buying and holding the Nvidia stock right now, you should be focused on the end buyer of the Nvidia chips and the data centers.
Many retail investors and some institutional investors were confused as to why would Nvidia’s stock drop after a very good earnings report. When you’re looking at the bigger institutions that have made a killing on the stock, at the sovereign wealth fund, mutual fund, and hedge fund levels, the big insiders are not looking at the same things as the average viewer of CNBC. The largest pension fund in the United States was recently seen dumping Nvidia stock.
The smart money doesn’t see any cash conversion from AI with the Nvidia customers. This is what most Nvidia bulls are missing. The hyperscalers can’t blow money on AI buildout forever, without cash generation and profitability. For example, Oracle is borrowing money for their AI buildout and there is only so much debt it can take on without seeing ROI from the Capex. Star analyst Dan Niles sees Oracle’s Capex declining. I remember when CEOs were coming on CNBC and bragging about how much they were spending on Nvidia chips and data centers and giggling. In hindsight, this is likely to be seen as an important marker of a historic bubble that was close to the top.
This pattern resembles the railroad boom of the 1860s-1870s when excessive capital flowed into infrastructure that couldn’t possibly generate returns on all that investment. Or recall the fiber optic bubble of the late 1990s, when companies laid massive amounts of cable that sat dark for years while many investors went bust.
Now, the rise of cheaper chips and open-source models such as China’s DeepSeek are important factors on the bearish side. Nvidia’s margins can only go one way as AI infrastructure and chips become more efficient. We are already seeing evidence of margin contraction in the latest earnings report. Microsoft CEO Satya Nadella hinted at this recently when he mentioned planning to lease “a lot of capacity” in 2027-2028 rather than build it, saying “the only thing that’s going to happen with all the compute build is the prices are going to come down.” AI itself will help companies think differently and successfully attack Nvidia’s business model. Another bearish factor is companies are already diversifying away from Nvidia but this diversification won’t happen overnight.
The heavy selling pressure on Nvidia with really good earnings is telling us some of the the largest insiders and institutions, with the best information, are dumping the stock (with employees too), not all of it but de-risking and taking cash off the table. If you look at the charts and the volume, we’re talking the largest institutions are de-risking and diversifying from the stock as they see some things they didn’t see before.
The possibility that most investors are wrong on Nvidia’s prospects a few years out, is currently being priced into the stock. Everyone sees that Nvidia is killing the game right now but the smart money just doesn’t see the cash conversion a 12 months to a few years out and sees underappreciated risks that this speculative AI spending bubble pops. AI is the most transformational technology of our lifetime but that doesn’t mean the Nvidia customers buying high-priced, premium chips, will make money from AI.
Today, Reuters is reporting Alphabet is in talks to buy cheaper AI chips from MediaTek.
