The recent stock market has been like a roller coaster, making investors tense. How are you coping with this situation? Today, we will talk about the biggest risk factors in the current stock market. Let’s take a look at what’s happening in this ‘carousel’ led by Microsoft and Nvidia.
The Role of Hyperscalers and the AI Revolution
Microsoft announced massive CAPEX (capital expenditure), and Nvidia is the beneficiary of this situation, which seems like an endless cycle. Hyperscalers, such as Amazon Web Services, Oracle Cloud, Microsoft Azure, and Google Cloud, continue to invest heavily in expanding data centers to lead the AI revolution. This has resulted in a market capitalization increase of hundreds of billions of dollars and revenue opportunities. It seems like everyone is having the time of their lives, doesn’t it?
But can this ‘carousel’ keep spinning?
Potential Crisis in the Carousel
What if one of the carousel’s horses starts to wobble, or a CFO somewhere decides to slow down after reviewing the actual return on investment compared to expenditures? In such a scenario, the narrative around AI spending could change. Other CFOs might follow suit, delaying spending plans or adjusting shareholder expectations. What impact would this have on the dozens of related stocks we are investing in?
Particularly, we need to pay attention to how companies like Nvidia will be affected in such a situation. Nvidia plays a crucial role in AI-related hardware and software but is highly dependent on its major customers.
Nvidia’s Major Customers
Nvidia does not disclose who its largest customers are. However, according to its recent 10-K filing, one customer accounted for 13% of its computing and networking segment revenue. This leads us to speculate that major tech companies like Amazon, Meta Platforms, Microsoft, and Alphabet are Nvidia’s largest customers. Will these companies continue to sustain their investments?
AI Revolution and Air Pockets
The potential of generative AI is immense. AI will bring tremendous efficiency to all of us and could reshape the entire economy. However, as seen in previous technological revolutions, when too much enthusiasm begins, there can be short-term disappointments, known as ‘air pockets.’ When an air pocket occurs, plans are scaled back, stock prices plummet, and many ideas fail.
Being optimistic about the birth of the internet in 1999 was correct. However, thinking there would be no air pockets was wrong. We need to maintain a balanced view based on the potential of AI and our experiences from previous cycles.
Conclusion
The biggest risk in the stock market right now is the potential sharp decline in technology investments by hyperscalers. This could significantly impact companies at the center of the AI revolution. Therefore, investors should always keep this possibility in mind and prepare strategies that can quickly respond to changes in the situation.
Reference: Josh Brown, “This is the Biggest Risk to the Stock Market”