Nvidia Beat Earnings, but Investors Are Asking the Wrong Question. Here's the Right One.

They say the sequel is never as good as the original, but Nvidia (NASDAQ: NVDA) seems to be proving that wrong. Three years after the launch of OpenAI's ChatGPT, which kicked off the artificial intelligence (AI) boom, Nvidia is still posting blockbuster results and blowing past Wall Street estimates quarter in, quarter out.

The AI chip superstar reported revenue of $57 billion in the quarter, up 62% from the quarter a year ago. That actually represented an acceleration from the second quarter, when sales growth had slowed to 56%, and was well ahead of the consensus at $55.1 billion. Notably, that acceleration came without the return of significant revenue from China.

Once again, growth in data center revenue, the focal point of the AI boom, was even stronger, up 66% to $51.2 billion.

The news helped to quell fears about an AI bubble at a time when tech stocks have been pulling back, especially those that are most exposed to AI, including highly leveraged neocloud operators like CoreWeave and Nebius.

Nvidia, which was down 12% from its recent high before the report, jumped 6% on the news, adding $300 billion in market value to approach a $5 trillion market cap again.

Image source: Nvidia.

Bubble, what bubble?

Nvidia CEO Jensen Huang didn't shy away from addressing talk of an AI bubble. In fact, he began his remarks on the earnings call by addressing those concerns, saying: "There's been a lot of talk about an AI bubble. From our vantage point, we see something very different."

Huang went on to explain the massive investment in non-AI software, and said he sees that shifting away from central processing units (CPUs) to Nvidia graphics processing units (GPUs), arguing that "Accelerated computing has reached a tipping point," and that AI has as well.

Nvidia's guidance indicates that its blistering growth will continue into the fourth quarter as the company is calling for revenue of around $65 billion, well ahead of expectations at $62 billion and representing 65% growth from the quarter a year ago, meaning Nvidia's revenue growth would accelerate again in the fourth quarter to 65%.

Investors need to zoom out

Making Nvidia the avatar of the AI revolution makes sense. After all, Nvidia stock has skyrocketed since the launch of ChatGPT. It's now the most valuable company in the world, at nearly $5 billion, because of AI, and because it continues to dominate the market for data center GPUs and AI compute.

However, investors following Nvidia for clues into whether or not there's an AI bubble need to look elsewhere as well. Nvidia's contribution to the AI revolution is essential, but the company is building the rails for the AI boom, and that only counts if people want to ride the trains. In tech, that means the hardware Nvidia provides to run AI software.

In order to determine that, the best place to look is at the AI start-ups leading the way, like OpenAI and Anthropic, and CFO Colette Kress pointed to the surging growth at those companies and others, noting a positive virtuous cycle that is leading to increasing adoption and profits.

OpenAI and Anthropic are harder to follow because they're privately held, but their numbers back up those claims and should allay concerns of a bubble.

OpenAI's valuation has hit $500 billion, but it expects to more than triple its revenue this year, hitting $13 billion, or a run rate of $20 billion. Considering software valuations that are sometimes 25 or 30 times sales, or even higher, OpenAI seems reasonably valued given how fast it's growing. CEO Sam Altman even suggested that the company could hit $100 billion by 2027.

Anthropic is in a similar situation, on track to reach run-rate revenue of $9 billion and aiming for $20 billion to $26 billion in run-rate revenue by the end of 2026, making its valuation of $350 billion look fair as well.

Adding in Palantir, which has a market cap of $400 billion, the three most valuable software companies are now squarely AI software companies.

We're likely to see more of the software value in the tech sector shift to AI, as Huang predicted.

As long as companies like OpenAI and Anthropic are doubling or tripling their revenue, concerns of an AI bubble seem overblown.

As Nvidia's management explained, a tipping point and a positive virtuous cycle are at hand. Investors shouldn't mistake the problems in the broader economy for cracks in the AI storyline as AI adoption is ramping up rapidly at both the hardware and software levels.

Jeremy Bowman has positions in CoreWeave and Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.