RPT-BREAKINGVIEWS-Nvidia is dogged by memories of cycles past

By Robert Cyran

NEW YORK, Feb 25 (Reuters Breakingviews) - Nvidia’s NVDA.O chips are essential for artificial intelligence. It's unsurprising, then, that on Wednesday it reported selling a lot of them. In the quarter ending January 25, revenue expanded73% year-over-year to $68 billion, as demand grows at a seemingly insatiable rate. The problem for the $4.8 trillion technology titan is that investors seem skeptical that the good times will last.

For now, it's hard to fault boss Jensen Huang’s results. Nvidia’s gross margin came in at an astonishing 75%. The mad rush among the biggest tech firms in the world to stuff data centers with its gear – Meta Platforms META.O, for example, increased investment spending by some 50% last quarter – means the company has incredible pricing power. And the boom isn’t ending soon, with Alphabet GOOGL.O pledging to double capital expenditures this year, up to as much as $185 billion.

The issue is whether Huang can hang on to the spoils. Data centers also require land, buildings, power and skilled labor. All of these will eat up budgets, too. But Nvidia faces its own supply constraints. One obvious shortage is in specialized memory. The computational power of AI chips is outpacing the ability to shuffle around the massive amounts of data they require. The result has been a rapid rise in prices for chips that store these bits, made by the likes of SK Hynix 000660.KS. The South Korean firm’s sales of high-bandwidth memory more than doubled last year.

Thus far, every sign has indicated that Nvidia can pass through higher costs to customers. On Wednesday, it said it has inventory and capacity to meet demand beyond the next several quarters. Yet widespread memory shortages have become far more acute in the past six months. A respondent in the Dallas Fed’s Texas Services Sector Outlookreleased Tuesday said the components faced “pandemic-like supply constraints.” If this situation persists, memory makers may end up finally gobbling more of the industry’s profits. Investors appear to expect as much, bidding up their share prices while Nvidia’s stock has gone nowhere.

A bigger problem may lie simply in how long, and how far, the data center build-out can go. This is not the first boom the memory market has seen – or bust. SK Hynix, for example, lost over $6 billion in 2023, thanks to a post-pandemic glut. Investors price this in: even after the company's vertiginous rise, it still only trades at 5 times estimated earnings over the next year. Nvidia, on the other hand, is priced at 24 times, according to LSEG. If past is prologue, these valuations could converge further. They are, after all, dependent on the same cycle.

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CONTEXT NEWS

Nvidia said on February 25 that revenue for the quarter ending January 25 was $68 billion, an increase of 73% from the same period a year ago.

Nvidia earned $1.76 per share, compared to 89 cents per share in the fourth quarter last year.