Nvidia’s earnings surge renews confidence in AI theme, CLSA says fears 'overstated'

Nvidia

Chipmaker Nvidia, touted as the bellwether for the artificial intelligence theme, posted a strong earnings show for the September quarter, a beat on most fronts, reinforcing the bullish narrative around the artificial intelligence frenzy. CEO Jensen Huang's commentary on the AI bubble strengthened the bulls' conviction, leading shares to stage a smart rally in trade.

For the quarter, Nvidia reported $57 billion in revenue, higher by 22 percent on a sequential basis, while soaring 62 percent on a year-on-year basis. The firm's net income clocked in at $31.9 billion, higher by 65 percent YoY, as against $19.3 billion in the same quarter last year.

Further, the firm's gross margin improved 100 bps QoQ, and is guided to rise another 140 bps QoQ into Q4FY26. As per guidance, in the fourth quarter, at the top end, Nvidia could record a revenue of $66.3 billion, ahead of consensus' current expectations.

Given the strong guidance and growth outlook, the firm's CEO as well as analysts believe that the concerns of a bubble in the AI space are vastly overblown.

In the post-earnings call with analysts and shareholders, Huang said, “There’s been a lot of talk about an AI bubble. From our vantage point, we see something very different. As a reminder, Nvidia is unlike any other accelerator. We excel at every phase of AI from pre-training to post-training to inference.”

He added, "We’ve entered the virtuous cycle of AI. The AI ecosystem is scaling rapidly with the emergence of new foundation model makers and AI startups across multiple industries and in numerous countries. AI is going everywhere, doing everything, all at once.”

Not just the Nvidia founder, but even experts at large brokerages are calling the fears overstated. In a note, CLSA said, "We think persistent AI doomerism has reached a fever pitch and ignores on the ground realities. Even those who fret about ‘circular deals’ must know that no AI accelerator has come out of TSMC’s plants, yet, to satisfy these ‘letters of intent’."

The brokerage added that the ground reality of AI is that usage is exploding when chips are short in supply. At the current juncture, the AI ecosystem is in its infancy, with much road ahead. Additionally, token consumption has been running ahead of estimates, doubling every three months, instead of a previously estimated 12 months.

Therefore, CLSA argued that Nvidia’s valuation, at a 31x NTM earnings, is perplexingly low. "We think its 3Q results and 4Q guidance clear the road for a meaningful rerating."

As per CLSA, "Nvidia's valuations do not reflect the centrality of its role in the ongoing AI revolution, where it has at least an 80 percent share of GPUs, pricing power and a tailwind of growing demand for token processing, as AI's use percolates into knowledge work, entertainment and into the physical world via robotics and autonomous cars. This is a longer runway than markets believe."

As a result, the brokerage decided to retain its ' High-Conviction Outperform' rating and a target price of $270 per share, indicating an upside potential of 45 percent within the next one year.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.