Heroic Expectations

29 August 2025

Earlier this month following the Microsoft and Meta results we discussed AI and the spiraling cost model. The key beneficiary of the aggressive capital spending by the mega-cap tech companies (Microsoft, Meta, Alphabet and Amazon) has been NVIDA. Clearly the health of the AI investment boom is critical to the earnings outlook for the world’s largest company and the supply chain in Asia.

Most analysts will argue that robust revenue from the majors will justify the aggressive capital spending, however the competitive pressure to keep leap frogging each other on AI spending has likely created a spiraling cost model arguably with no exit. The key winner in the near term is NVIDIA and the supply chain as the semiconductor chips bought this year are potentially made obsolete by the new ones coming out next year. However, as we noted earlier this month, under Moore’s law, there is probably no competitive advantage in AI, only commodification.

The guidance from NVDIA following the company’s results after the US close today was a little disappointing. Sales were projected to be around $54 billion in the fiscal third quarter but slower than the upper end of consensus beliefs (around $60 billion). The company rejected the notion that interest in deploying AI infrastructure was flagging. The CEO argued that the “opportunity ahead is immense” and predicted $3 trillion to $4 trillion in AI infrastructure spend by the end of the decade. Clearly no one knows, however McKinsey and others have questioned the returns on investment in AI. Moreover, competition from China suggests that the winners might not be who we originally thought, and the existing capital expenditures might end up being very wrong.

What is interesting is that NVDIA is trading on similar valuation multiples to the period in 2022 prior to the AI boom. Put another way, the large gain in the equity price over the past three years has been warranted by the growth in earnings (chart 1). It has only been a little less than three years since OpenAI released ChatGPT into the world. There has clearly been enormous development since then with a lot of tech companies have clearly pivoted to AI and the theme has become the dominant narrative in global equity markets. Clearly the rampant demand for processing power has transformed NVDIA into the world’s largest company and benefited the supply chain (Taiwan Semiconductor and others) in our region.

Chart 1

Source: Bloomberg

While the stock price gains have been warranted by earnings, if capitalism works, competition will (eventually) pressure margins. Moreover, there is material downside risk if AI does not deliver the returns on capital to meet investor expectations. In our process, when price itself moves in a non-linear parabolic way with heroic valuation that is a warning sign that the trend is mature. While many elements of the AI boom have been warranted, the US information technology sector trades at 10 times sales which is beyond the valuation seen in the 2000 internet bubble 25 years ago. Much of the technology created during the internet bubble was extremely important for the global economy. However, many of the companies did not survive and returns to investors were poor over the bust from 2000-2002. The price you pay still matters for your future return.

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