AI Valuations Corrected Themselves: CFRA’s Zino

Key Concepts

• Nvidia's Market Dominance: Nvidia currently holds over 90% market share in the GPU compute market.
• Custom Silicon: The rise of custom silicon chips (like TPUs) is expected to chip away at Nvidia's market share.
• Alphabet's TPUs: Alphabet's Tensor Processing Units (TPUs) are presented as a potential competitor to Nvidia's GPUs.
• Nvidia's Margins: The discussion explores whether competition will put pressure on Nvidia's high margins in its datacenter business.
• Nvidia's Next-Gen Products: Nvidia's upcoming products like Rubin and Rubin Ultra are expected to drive significant content growth and maintain their leadership.
• Broadcom's Opportunity: Broadcom is identified as a potential beneficiary of the shift towards custom silicon and is expected to gain market share.
• Equity Valuations: The conversation touches upon current equity valuations, with a view that they have become more attractive after recent pullbacks.
• Meta and Nvidia Valuations: Meta and Nvidia are highlighted as potentially attractive rebound plays due to their recent pullbacks and reasonable valuations.
• Data Center Growth Risks: Energy bottlenecks and infrastructure issues in the US are identified as significant risks to data center growth and development in the coming years.

Competition in the GPU Market

The discussion centers on the emerging competition for Nvidia in the GPU market, particularly from Alphabet's Tensor Processing Units (TPUs). While Nvidia has historically dominated with over 90% market share in GPU compute, the prevailing view is that this dominance is expected to erode. The expectation is that custom silicon chips, including Alphabet's TPUs, will gain a larger piece of the market. AMD is also anticipated to emerge as a second alternative in the GPU market. This shift is described as a "slow roll" but is playing out as anticipated.

Alphabet's Strategic Pivot and Potential Impact

There's a strategic pivot being considered by Alphabet, potentially involving selling their TPUs to Meta. The speed at which this scales up is seen as a risk to Nvidia's narrative. However, it's acknowledged that Nvidia is expected to remain the dominant player. Investors are advised not to overemphasize the "share fight" and to consider the broader total addressable market opportunity for Nvidia over the next few years.

Margin Pressure on Nvidia

A key question raised is whether the increased competition, even if Nvidia remains the market leader, will put margin pressure on the company. The possibility of Nvidia having to lower prices for its GPUs due to alternative options for some customers is explored.

Angela's Perspective on Nvidia's Margins: Angela's view is that margin pressure is not an immediate concern. She believes Nvidia is a generation ahead technologically and will continue to lead through advancements. The upcoming "Rubin" and "Rubin Ultra" products are expected to drive significant content growth in the data center segment, thereby supporting Nvidia's revenue trajectory and margins. She is not concerned about margins in the near term (next 18-24 months). However, she acknowledges that if supply-demand dynamics even out and competitive pressures intensify, it could become an issue.

Opportunity for Alphabet and Broadcom

The potential for Alphabet to ramp up production and quickly deliver TPUs to customers is discussed. While it's seen as an opportunity for Alphabet, it's not expected to capture a huge chunk of the market.

Broader Opportunity for Broadcom: The discussion highlights that the opportunity is actually bigger for Broadcom. Accelerating growth in Broadcom's semiconductor business in 2026 and 2027 is seen as an intriguing play, especially alongside their software offerings. For those concerned about Nvidia's market share loss, Broadcom is presented as an interesting play on a company that will be taking market share in customer silicon growth, while also broadening its customer base beyond just Alphabet's internal use to other silicon vendors.

Equity Valuations

The conversation shifts to equity valuations. Angela expresses that she feels "much better about valuations today than I did three or four weeks ago." She notes that the market has experienced a "self-correction."

Pre-Correction Valuations: Prior to late October, valuations were at levels seen during the June 24 tech highs and were at 20-year highs.

Post-Correction Valuations: Following a better-than-expected Q3 earnings season and a pullback in the tech sector, multiples have compressed. Valuations are now considered to be at levels expected on a forward basis over the last five years.

Enticing Opportunity: Given the earnings growth expected over the next 18-24 months, current valuations are considered an "enticing opportunity," particularly for larger-cap tech names.

Attractive Rebound Plays: Meta and Nvidia are specifically mentioned as companies with "some of the most reasonable valuations out there" and could be "nice rebound plays" following their sharp pullbacks.

Risks to Data Center Growth in the US

A significant risk to data center growth and development in the US is identified as energy bottlenecks and infrastructure issues, particularly looking towards 2026, 2027, and 2028. This is framed as a potential scenario where China could take a lead due to infrastructure limitations in the US. The narrative is shifting from bookings and growth expectations to the execution of data center buildouts, making these infrastructure constraints a critical factor.

Conclusion

The discussion highlights a dynamic shift in the semiconductor landscape, with custom silicon posing a growing challenge to Nvidia's long-standing GPU dominance. While Nvidia is expected to maintain its leadership in the near term due to technological advantages and upcoming product cycles, companies like Alphabet and particularly Broadcom are positioned to benefit from this evolving market. Furthermore, current equity valuations in the tech sector are viewed as more attractive after recent market corrections, with Meta and Nvidia identified as potential rebound candidates. However, significant headwinds for data center expansion in the US are emerging in the form of energy and infrastructure limitations, which could impact future growth.