Terrific quarter, terrible reaction

As Yogi Berra once said, it’s déjà vu all over again: Nvidia’s post-earnings bump after solid results and stellar guidance soured on Thursday, with the stock suffering its worst daily loss since April.

During its conference call, management talked up how strong the demand outlook is — not just for this year, but for 2027 as well. CEO Jensen Huang was asked whether the hyperscalers, Nvidia’s biggest customers, would continue to pour even more money into his GPUs when their ability to generate cash has been getting weaker and weaker because of all that capex, as this simple chart makes plain.

Huang indicated he was confident that hyperscalers’ cash flows would improve and said, “In this new world of AI, compute equals revenues.”

The problem is that Wall Street’s expectations for free cash flow have done nothing but go down since the AI boom started. “There’s always next year” has been the thinking for when these investments would result in more cash coming in the door, but “next year” has yet to arrive.

Nvidia is still undoubtedly the epicenter of the AI boom. But while it once traded off its customers’ capex budgets, its fate is now seemingly more tied to its customers’ return on investment.

The Takeaway

Automaker Henry Ford famously wanted to pay his employees enough so that they could afford to buy the cars they produced. Similarly, investors need to be convinced that Nvidia’s GPUs earn enough for their buyers so that these purchases will continue to accelerate.

AI is still being treated as a powerful force in the stock market, with the potential for upheaval across different industries. It’s also making its presence felt in the bond market — which encompasses the totality of expectations for economic activity.