Nvidia crushes Q3 earnings, analyst reacts to AI chipmaker's results

Key Concepts

• Nvidia Q3 Earnings: Strong performance with a "beat and raise," exceeding expectations for revenue and guidance.
• AI Demand: Exponential growth and compounding compute demand, with cloud GPUs sold out and Blackwell sales "off the charts."
• Gross Margins: Nvidia returning to 75% gross margin, a positive sign after previous controversy.
• AI Valuations & Concerns: Persistent concerns about AI trade and valuations, addressed by Nvidia's strong forecast and commentary.
• Cumulative Orders: Nvidia has $500 billion in cumulative orders for 2025 and 2026, indicating strong future visibility.
• GPU Depreciation: GPUs are used as long as they are economic, with older generations still highly profitable due to strong demand.
• Competitive Landscape: AMD and custom ASICs from companies like Google (TPUs), Broadcom, and Marvell are making inroads, but Nvidia remains a strong solution.
• China Business: Currently zero due to restrictions, but long-term, it's a strategic concern for Nvidia to maintain its ecosystem and prevent local alternatives from gaining scale.
• Tech Sector Performance: Tech was the only outperformer on the day, but broader market breadth was negative. Healthcare has been the leading sector for the quarter.
• AI Bubble Debate: The consensus is that there is an AI bubble, but it's seen as a feature of capital markets that drives innovation and identifies strong companies.
• Crypto Market: Undercutting recent lows, with key support levels at $90 and then $73-$76.
• Job Market: Sluggish overall, but the contingent and flexible workforce is seeing growth, particularly in AI-related roles.
• AI Impact on Jobs: While some low-end jobs are being automated, AI is creating new opportunities and increasing the complexity and size of projects.
• Freelancer Rates: Freelancers with AI skills are earning a 40% premium.
• Future of Freelancing: AI will be integrated into every job, but human skills like creativity, judgment, and problem-solving will become even more valuable.
• Upcoming Economic Data: Delayed September jobs report, retail earnings (Walmart, Ross, Gap), and Federal Reserve commentary.

Nvidia's Third Quarter Results and AI Outlook

Nvidia has reported strong third-quarter results, characterized by a "nice solid beat and raise." The company's guidance for the next quarter was set at $65, which was considered to be in the "bullish zone" of buy-side whisper numbers. A significant positive development is the return to a 75% gross margin, a figure that had been a point of controversy throughout the year.

Key Commentary from Nvidia's Release:

• Blackwell Sales: Described as "off the charts."
• Cloud GPUs: Reported as "sold out."
• Compute Demand: Accelerating and compounding, growing exponentially, and entering a "virtuous cycle of AI."

This commentary suggests a highly optimistic outlook from Nvidia's leadership regarding the ongoing AI boom.

Addressing AI Valuation Concerns

Broader concerns about AI trade and valuations have been a persistent theme. Nvidia's strong forecast and the commentary from its leadership aim to alleviate these worries. Previously, at an event in Washington D.C., Jensen Huang stated that current numbers were "way too low" and presented a chart indicating "$500 billion of cumulative orders across 25 and 26," with a relatively small portion shipped to date. This implies strong visibility and a trajectory consistent with robust future growth, potentially offering investors comfort.

The Depreciation Question and GPU Lifespan

The lifespan and upgrade cycle of GPUs have been a subject of discussion, notably raised by Josh Brown. The analysis suggests that GPUs are utilized as long as it is "economic to use them." Currently, even older generation GPUs like "Hoppers" are extremely economic to operate, with very high contribution margins. The primary driver for continued use is the immense demand for compute power.

Argument Against Depreciation Concerns:

• Demand Sustainability: The core of most AI bear cases is the unsustainability of demand. If demand weakens significantly, it would pose a problem for the entire industry, not just Nvidia's depreciation.
• Economic Viability: GPUs remain profitable as long as revenue levels exceed cash costs. This is currently the case.
• Physical Lifespan: GPUs do not "turn into dust" after a few years; they remain functional and profitable as long as deployment is economically viable.

Competitive Landscape for Nvidia

While Nvidia remains a dominant player, the competitive landscape is evolving:

• AMD: Their significant ramp-up is anticipated around the end of next year with their MI450 and rack-scale offerings. Newer products are not yet gaining substantial traction.
• ASICs (Application-Specific Integrated Circuits):
  • Google's TPUs (Tensor Processing Units): Developed over a decade, Google's TPUs are considered very good.
  • Broadcom and Marvell: Also developing custom chips.
• Overall Perspective: The question of who is "winning or losing" is less critical than the overall size of the opportunity. If the AI market remains large, there is room for multiple players. The overarching question remains whether demand is sustainable.

Nvidia's China Business Outlook

Currently, Nvidia's business in China is "zero" due to restrictions. Any future engagement would be considered an upside. The company's decision to remove China from its reported numbers indicates that growth outside of China is sufficient for the near term.

Long-Term Strategic Importance of China:

• Ecosystem Preservation: Not being able to sell into China encourages Chinese customers to coalesce around local alternatives like Huawei, building scale behind those ecosystems.
• Preventing Competitor Growth: This can lead to local alternatives becoming more effective competitors over time.
• Jensen Huang's Stance: He has been open about the consequences of not being allowed to compete in China.

Tech Sector Performance and Market Breadth

On the day of the report, the tech sector (XLK) was the sole outperformer relative to the S&P 500. However, broader market breadth was negative, as indicated by the S&P 500 equal-weighted index being down while the S&P 500 was positive. This suggests that gains were concentrated in a few large-cap tech stocks. Healthcare has been the leading sector for the quarter, with significant gains compared to energy, utilities, and other sectors.

The AI Bubble Debate: Opportunity in Volatility

The discussion around an "AI bubble" is acknowledged. Jay Hatfield, a former money manager for Steve Cohen, argues that "bubbles are good" because they allow for early market entry and capital to flow to areas of high potential returns. While many companies may become overvalued, this process ultimately leads to a smaller group of highly successful, trillion-dollar companies. Bubbles are viewed as a feature, not a bug, of capital markets, presenting opportunities.

Nvidia's Post-Earnings Performance History

Historically, Nvidia's post-earnings returns over the last 10 quarters have averaged 3.6%. Six out of these ten reports were positive, with an average gain of 9%. The four negative instances resulted in an average loss of 4.5%. The initial aftermarket surge of approximately 4% suggests a potentially strong opening for the stock.

Crypto Market Update

The crypto market has recently undercut its previous lows, trading around $90. Key support levels are identified at $90 as a medium-term level, and a more significant zone between $73 and $76. A break below these levels would indicate significant trouble for the crypto market.

The Job Market and the Rise of Contingent Work

The labor market is described as "sluggish" and has been for several quarters. However, the contingent and flexible workforce, a $1.3 trillion market in the US, is showing signs of growth, particularly driven by AI.

Key Observations from Upwork CEO Hayden Brown:

• AI Job Creation: More jobs are being created on the contingent side due to AI, especially for individuals with skills in AI tools and technologies.
• Demand Growth: Upwork sees 60,000 jobs posted weekly, with significant demand in AI, representing a $300 million annualized spend.
• Growth in Traditional Roles: Categories like admin assistants and lawyers, which were predicted to be decimated by AI, are also growing on the platform.
• Shift in Employment Models: Companies are moving from fixed, full-time employment to models that leverage the flexibility and skills of contract workers.
• Market Stabilization: While not improving, the job market has stabilized over the last two quarters, with the rate of deterioration flattening out.
• Reduced Uncertainty: A decrease in uncertainty regarding tariff policies and interest rates has made companies more comfortable moving forward with hiring plans.

Freelancer Rates and AI Skills Premium

Freelancers with relevant AI skills are commanding a 40% premium over others in the market. This incentivizes upskilling and reskilling, as individuals can earn more by working alongside AI technologies.

AI's Impact on Human Jobs: Automation vs. Augmentation

• Low-End Automation: Automation is occurring at the very low end of the market (jobs under $300), which constitutes a small and shrinking portion of Upwork's business (3.5%).
• Project Growth: The larger trend is that projects are becoming bigger and more complex.
• Increased AI Spend: Companies investing in AI apps and technology are spending three times more than non-AI spenders.
• Human Augmentation: Humans are still essential for many AI workflows, complementing technological capabilities.

Essential Skills for the AI Era

The fastest-growing category on Upwork is "AI, apps, and integration." The good news is that AI skills can be learned relatively quickly through online courses and hands-on experience. Individuals are moving up the learning curve rapidly, becoming experts in AI app integration and earning higher rates.

Upwork's Growth Drivers and Future Outlook

Upwork is benefiting from being an "AI beneficiary," with its AI category growing over 50% year-over-year. The company's strategy of investing in SMB and enterprise products is also proving successful.

Long-Term Drivers of the Freelance Economy:

• AI Integration: Every job will involve AI, and every freelancer will work with AI. Currently, 73% of talent on Upwork use AI daily.
• Value of Human Skills: Creativity, judgment, and problem-solving will become even more critical as they complement AI capabilities. Businesses are actively seeking these human skills.

The AI Bubble: Infrastructure vs. Application Layer

While an AI bubble is acknowledged, a distinction is made between the infrastructure side (where investment may be ahead of demand) and the application layer. Upwork operates in the application layer, developing AI solutions that drive incremental value. They see the opportunity in building the "next layer of services" that will eventually consume the demand generated by infrastructure investments.

CEO's Personal Use of AI

Hayden Brown uses AI extensively for drafting emails, synthesizing information, and engaging in strategic discussions, such as pricing strategies with ChatGPT.

Upcoming Economic Events

• Delayed September Jobs Report: Expected on Thursday, forecasting a modest rebound with 50,000 non-farm payroll additions. Unemployment and hourly wages are expected to remain steady.
• Retail Earnings: Reports from Walmart, Ross, and Gap are due on Thursday. Analysts expect Walmart to meet the high end of its sales forecast due to strong back-to-school season and consumer demand for value.
• Federal Reserve Commentary: A significant batch of Fed commentary is anticipated on Thursday, following cautious remarks from Richmond Fed President Tom Barkin regarding the labor market.