Nvidia Bulls Undeterred By Concerns Over AI Bubble
$NVIDIA(NVDA)$
Shares of the biggest player in semiconductors that power artificial intelligence (AI) applications fell 1.4% to $173.12 at 2:02 p.m. in New York Wednesday as the tech heavy $NASDAQ(.IXIC)$
Tech stocks were in retreat days after OpenAI CEO Sam Altman reportedly said he thinks AI could be in a bubble, joining $Alibaba (BABA.US)$ co-founder Joe Tsai, Bridgewater Associates Founder Ray Dalio and $Apollo Global Management (APO.US)$ Chief Economist Torsten Slok in issuing the warning, CNBC reported Monday.
Despite warnings of a bubble, the biggest players in the industry are expected to continue building the necessary AI infrastructure. The 13 biggest tech companies in the world have a combined cash pile of $1 trillion, and have access to cheap debt, enough to maintain balance sheet flexibility and ensure resilient credit quality even amid the AI spending surge, Bloomberg Intelligence credit analysts Robert Schiffman and Alex Reid wrote in a note Wednesday.
"The rate of cash generation continues to outpace spending, despite record-high shareholder returns and AI-related capital expenditures, minimizing ratings risk,” the analyst said.
While the biggest block trade in Nvidia options involved an active seller unloading $43.68 million in call options, that was just part of a multi-leg transaction that included buying bullish call options which were double the size of the contracts that were sold.
Bulls were undeterred by recent declines amid Wall Street expectations that the AI giant, valued at $4.2 trillion, will be able to sustain its revenue growth, despite the uncertainty it's facing on China sales.
At 12:04:17 p.m. in New York, an active seller unloaded 23,100 call options that give their holders the right to sell a total of 2.3 million shares at $158 each in 30 days. At that exact time, another block trade was posted involving the purchases of the exact amount of call options with a higher strike price of $175, a block of the same size for the $185 strike price and another one for $195.
The price of those $158 call options climbed 162% since June 9, the last time volume reached more than 20,000 contracts. That rally bolstered the case for its holder to cash in gains one month before the options expire.
If those multi-leg transactions originated from the same person or entity, it could mean that the holder of the $158 call option was simply rolling his or her position to higher strike prices.
The bullish transactions were posted a week before Nvidia is due to release fiscal second quarter results. Analysts, on average, expect the company to report a 53% growth in revenue to $46.08 billion, buoyed by robust demand for AI chips, according to estimates compiled by Bloomberg.
Data center revenue could climb to $41.06 billion in the quarter ended July 31, up from $26.3 billion a year earlier, estimates showed.
CFRA analyst Angelo Zino expects demand for Nvidia chips to be sustained through 2026, aided by the expansion in the total addressable market that includes AI agents and physical AI agents. He also sees greater software capabilities across the data center stack. That and the company's plan “to accelerate the cadence of new chip designs (annually) should support its massive competitive moat.”
Even excluding the sales to China, Bloomberg Intelligence industry analysts Kunjan Sobhani and Oscar Hernandez Tejada see Nvidia's guidance landing 10% above estimates.
"A modest beat for 2Q results and 3Q guidance appears possible as China reopens and GB300 ramps up," they said, referring to Nvidia's next-generation AI graphic processing unit system designed for the most demanding AI workloads.
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