Nvidia’s Blowout Can’t Calm AI Anxiety

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0:43Ian Bremmer:Amazon bietet allen frischgebackenen Eltern in den Logistikzentren extra Familienboni. So wie Anton, der gerade seine neugeborene Tochter im Arm hält. Ihr Glucksen ist für ihn das schönste Geräusch der Welt. Das heißt, vielleicht ist das Geräusch das schönste von allen.

1:02Gil Luria:Today's number two. That's how many affairs with Russian women Bill Gates admitted to have had after he apologized for his ties to Jeffrey Epstein. The Microsoft founder says he, quote, did nothing illicit and saw nothing illicit, and that he, quote, never spent any time with the women around him. Today's other number is zero. That's how many people believe him.

1:28Ed Elson:Money market's mad. If money is evil, then that building is hell.

1:38Gil Luria:Welcome to Prof G Markets. I'm Ed Elson. It is February 26th. Let's check in on yesterday's market vitals. The major indices climbed ahead of Nvidia's earnings. More on that in a moment. Bitcoin bounced from recent lows, rallying back towards 70 ,000. The price of gold, silver, and platinum increased. And finally, Netflix rose 6 % in its best day in more than a year. That rally followed reports that Paramount's new offer may be good enough to win the bidding war for Warner Brothers Discovery. Okay, what else is happening? The world's most valuable company, NVIDIA, reported earnings yesterday that beat expectations on the top and bottom lines.

2:23Gil Luria:That was largely driven by data center revenue, which rose 75 % year over year in the quarter. Revenue projections for the current quarter also came in higher than investors had expected. NVIDIA stock rose as much as 5 % after hours, but then moderated during the call. Salesforce also reported yesterday, but those earnings had a very different outcome. The company's revenue grew 12 % in the fiscal fourth quarter, which was its fastest growth rate in two years. However, investors were disappointed with the company's revenue guidance for 2026. That sent the stock down nearly 6 % after hours. Joining us to unpack these earnings.

3:06Gil Luria:We are speaking with Gil Luria, head of technology research at DA Davidson. Gil, good to see you. I want to start with NVIDIA here. Another incredible monster quarter. This keeps on happening. Everyone thinks that we're going to see an issue and everyone gets very anxious and then just an unbelievable quarter. Your initial reactions.

3:29Ed Elson:Well, not only is it, and it is unbelievable. The numbers are just getting staggering, especially for a company that's so profitable to be able to grow at these rates continuously. But beyond that, they just said they're going to grow sequentially for the rest of the year. They don't typically give more than one quarter out. So the fact that they have that visibility and talked about that going into calendar 2027 tells you that they have more visibility than ever. Their customers are making longer-term commitments than ever. they can see the rollout of the data centers happening at such a rate and with such a backlog that they know that they'll be able to continue to grow from here on out, which is, again, very impressive, especially when the numbers are this big.

4:17Gil Luria:What does this mean for the, I don't know if I could call it AI bubble story at this point, the AI anxiety story, maybe we have to call it. I mean, we saw the Cetrini Research article that came out this week and got everyone very anxious about AI. We've seen just incredible drawdowns in the software sector, again, because of AI. What does this do to the AI story? How are investors thinking about this now that NVIDIA continues to dominate?

4:48Ed Elson:Well, there's two different types of anxiety, and they're actually the polar opposite of each other. One level of anxiety is, oh my goodness, we're building so many data centers, this can't be sustainable, when it stops, the music's going to stop, the economy's going to decline, NVIDIA's going to decline, the hyperscalers can't afford to do this. That's one level of anxiety that we've been living with for a few months. The other level of anxiety is the exact opposite. Oh my goodness, AI is so potent, it's going to run us over, it's going to go industry by industry and destroy it, and software stocks are worth nothing at their terminal value.

5:29Ed Elson:Those two things are opposite. Either you believe AI is great and it's going to transform the economy in two years, or you believe that AI isn't that good and we're going to stop building data centers. Those two things are opposite types of anxiety. And we think that, you know, I've lived with a lot of anxiety in my life, but we can take a deep breath and say both of those things are pretty extreme perspectives. What we do know is that AI is incredibly valuable. It's very potent technology that we are just starting to realize how useful it is to both business customers as well as consumers. Business customers are willing to make long-term commitments, which is why Microsoft, Amazon, and Google are building these data centers because they have these long-term commitments.

6:16Ed Elson:And consumers are willing to pay more and more for these subscriptions and using these tools in an even more comprehensive way. We know that's happening, so the anxiety about AI isn't real and we don't need these data centers. NVIDIA can help us put that aside by telling us, look, this data center construction is going to continue. On the anxiety of AI is happening too fast and everybody's going to be unemployed, we can also take a deep breath about that and say somewhere between software engineers that are very much impacted by AI and nurses that are probably not going to be impacted by AI in decades.

6:57Ed Elson:We have all the other professions. And yes, AI is going to impact every single profession in that progression, but not all at once. Some professions are more susceptible than others. They will change. The hiring around those will change. People that no longer fit in that profession will move to the other professions. This is not going to happen in a two-year time frame. Those types of essays are science fiction. They are doomer porn. We can put them aside and just focus on what's in front of us, which is a very powerful technology that can drive productivity growth, which is a good thing. It'll help increase the value of our labor, which will get us paid more.

7:38Ed Elson:It'll help our companies grow faster so they can hire more. That's the more likely scenario than those extreme concerning scenarios.

7:47Gil Luria:I think that the Salesforce earnings is a good sort of foil to the NVIDIA earnings, both coming out the same day, which is a reflection of those AI anxieties that you just brought up there, that AI is going to be so great that it's going to kill all of the legacy companies. I look at the Salesforce earnings, revenue grew 12%. That's very strong. I looked at remaining performance obligations,$35 billion, which is actually higher than expected. The only issue was the revenue guidance for the year, which everyone is saying was a miss. But to me, it was a meet. I mean, they said$45.8 to$46.2 billion.

8:27Gil Luria:Wall Street expected$46 billion. That sounds like exactly what they said. But shares are tanking down nearly 6 % after hours. What does that earnings tell you about the AI anxiety story? And what do you think of these earnings? Do you think that they are as bad as everyone else seems to think they are?

8:49Ed Elson:I think the least of Salesforce's issue is AI. I actually think the issue with Salesforce is that their business is just decelerating rapidly. The growth rate was higher this quarter because they acquired Informatica, which is contributing at least 3 % or 4 % to that growth rate. So they're already only growing high single digits. Just a couple of years ago, they were growing 15%. It's their business that's decelerating for reasons that have nothing to do with AI. They're losing share to HubSpot and Monday and ServiceNow and Braze and Klaviyo and a whole cottage industry of companies that are providing sales and marketing software that's just better than Salesforce.

9:30Ed Elson:Having said that, what you're saying is spot on in that the market is going to glomp onto this and say, oh, my goodness, AI is killing software. It's not. Salesforce is just decelerating and the results are declining. There's been plenty of companies that have reported good results so far this quarter, but their stocks went down anyway because of this negative narrative about software. But in Salesforce's case, it's really about just their core business not doing well.

9:58Gil Luria:Yeah. Yeah. What do you think about the tension of this AI anxiety right now? You mentioned the AI is going to be less impactful than we thought it was going to be, which is why it's a bubble. And so the valuations of everything are going to come down. And then there's the other argument, which is the AI is going to be so powerful that it's going to ruin all the business models as we know it. Those two forces seem to be in real contention with one another. and I'm struggling to figure out which one is actually the dominant sentiment on Wall Street, which one is actually the right sentiment, which one is crazier than the other.

10:40Gil Luria:And it's hard to sort of pass out what the price of these stocks are actually telling us at this point because those are two, as you say, completely opposite stories.

10:52Ed Elson:I'd say that we've been living with that first type of anxiety, The data center build-out isn't going to get a return for several months. The software anxiety is more recent. But I'd say both are playing out in the market right now and causing a lot of fear. But I would actually posit that maybe that's about something bigger. The fact that investors are so jittery right now is probably an indication that we've had a very long bull run, that there's concerns about the U.S. government and its policies, the geopolitics of our global relationships, our geopolitics of our trade policy that has to change every week now.

11:33Ed Elson:And so I think the market is jittery. It's looking for bad news. And now we have two opposing but compelling and scary stories that investors are telling themselves that are causing them to knock down stocks. I think that there is that layer of just overall jittery markets based on where we are from an overall macroeconomic and geopolitical perspective.

12:01Gil Luria:My instinct when I see these massive sell-offs is, I think, similar to yours, which is, this seems to me an overreaction. This seems to me highly emotional and not nearly grounded in the reality that we're seeing on the ground and the data, not nearly enough. At the same time, I could also see someone saying, you're just sweeping these concerns under the rug. It's convenient for you, especially you, Gil Luria, as someone who's in this industry, to say it's not a big deal, people are overreacting, things are going to be okay, look how productive the technology is. What would you say to those people?

12:47Ed Elson:I'm really not trying to sweep anything under the rug. I'm talking about, But we all have to make weighted probability decisions about potential outcomes. I'm just saying the world over building data centers is a 10 % outcome. The AI is going to run everything over in the next two years is a 10 % outcome. And there's an 80 % outcome that neither of those terrible things is going to happen. And if that's the case, we need to look at what the investable opportunities are. So one of them is NVIDIA, trading at 25 times when AMD and Bromcom are trading at 32 times with not as good of a business. Software, which for years traded on revenue multiples, which was always ridiculous.

13:31Ed Elson:What does it even mean to be six times revenue or eight times revenue? That means nothing. Shareholders only get cash flows. The value of a company is only the value of their future cash flows. All of a sudden, we're looking at this big universe of software companies on a cash flow base, on an earnings base. We have Microsoft at 20 times cash flow. We have ServiceNow and Dynatrace and Adobe trading at less than 20 times earnings or cash flow. And we have super hyper growth companies like Snowflake and Datadog and Shopify trading at maybe 35 times cash flow. So those are actual real opportunities that the market has created because of the extreme scenarios.

14:12Ed Elson:but I don't want to sweep them under the rug. They are potential scenarios. I'm just taking the weight and probability and saying, I think there's 80 % right up the middle that we're going to be fine, that AI enhances productivity in a way that makes software companies better, especially winners in software. Not every software company. There'll be plenty of software companies that fail, but the good ones will win and those are more attractively priced than they've ever been.

14:40Gil Luria:All right, Gil Luria, Head of Technology Research at DA Davidson. Gil, thank you for taking us through this. Thank you, Ed. After the break, what you didn't hear in Trump's State of the Union. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

15:06Ed Elson:What are the main takeaways of the foreign policy section from Donald Trump's State of the Union address. I do think they've made a decision

15:14Gil Luria:to elevate domestic issues as we head towards the midterms. We'll see if that sticks because he keeps getting drawn back to the foreign policy issues. I'm John Feiner. And I'm Jake Sullivan. And we're the hosts of The Long Game, a weekly national security podcast.

15:29Ed Elson:This week, we'll react to President Trump's State of the Union address, the situation with Iran, and the eruption of violence involving cartels in Mexico. The episode's out now.

15:38Gil Luria:Search for and follow The Long Game wherever you get your podcasts.

15:47Gil Luria:We're back with Prof G Markets. In the longest State of the Union address in history, President Trump said the nation has achieved, quote, a turnaround for the ages. He celebrated the strength of the economy, claiming that inflation is, quote, plummeting. It's not true. And incomes are rising fast. Trump also touched on new initiatives, including the Trump investment accounts and a pledge to make big tech cover its own electricity needs. While domestic issues dominated the speech, Trump did briefly touch on foreign policy as well. He claimed that he's ended eight wars and warned that Iran is rebuilding its nuclear weapons program.

16:26Gil Luria:He also briefly acknowledged the, quote, unfortunate ruling from the Supreme Court that deemed the tariffs illegal. earlier that day, his new 10 % global tariff rate officially went into effect. So here to discuss the State of the Union, we're speaking with Ian Bremmer, founder and president of Eurasia Group. Ian, thank you for joining us on Prof. G Markets. My pleasure. So this State of the Union, Trump spoke for a record 107 minutes, lots to unpack here. Let's just start with your initial reactions. What stood out to you?

17:04Ian Bremmer:I had 108 minutes, but I mean, you know, we might have started and stopped the timers at different points. You never know. It was very long. And there wasn't much new there. I mean, there was a surprise that a high level member of the Venezuelan opposition and someone that would be credible in a democratically elected government released and then surprised right there, introduced to his family on right there in in the Capitol building. That was a pretty big deal, frankly. I mean, it wasn't just cinematic. It is an actual success of the Trump administration. And it's a success for an attack against an authoritarian regime.

17:48Ian Bremmer:There's like forces of liberty and freedom. This is the kind of thing that any American president, if they had done, you would say, good on them. And yeah, I've got to be excited about having the American hockey team win the gold. I remember being in Vancouver for the gold medal match back when the Americans and the Canadians liked each other. And it was one of the most exciting sporting events I've ever been to in my life. I don't even like hockey, but everyone was so excited to be there. And frankly, the Americans were pretty happy for the Canadians were there because they're pretty more excited.

18:22Ian Bremmer:They're more excited about about hockey at the end of the day. But it was great to see them come home after that extraordinary overtime win that could have easily gone the other way. And there they were and excited. And they're athletes first and foremost. And they're flying the flag. And they're proud to be Americans. And everyone was cheering. I mean, that was great to see. But, I mean, I'm obviously starting with the good moments, right? Because, you know, after that, there wasn't a lot. There wasn't a lot. The economy is not doing well. Trump cannot will it so. This is Prof G Markets. You know that.

18:58Ian Bremmer:The average American is not happy about where the economy is. Trump is underwater on that. He didn't mention Epstein, even though it's been what we've been talking about for weeks now. Larry Summers is being forced out of Harvard. He clearly did not want to go. He was kicking and screaming. There are a lot of Democrats that are getting in trouble. So why is it that Trump is actually not saying a word about this? And it's because it's a two-tier judicial system. and he's protecting himself. He's protecting his members of his cabinet, his friends. And that's clearly unpopular for him too. And there are only so many more months to go before midterm elections.

19:36Ian Bremmer:And if those elections were today, the Republicans would get thumped pretty badly. And he knows it, he knows it. So this was not an easy speech to give. And for someone who's only gonna have so many opportunities to be in front of the population and really explain to them why it is they need to turn out for him and for the people that are his proxies on the ballot in November. He didn't do much of that last night, in my view.

20:07Gil Luria:It sounds like we might agree, at least my initial reaction to this State of the Union address. I expected it to be, or at least was waiting and preparing for it to be quite awful, or at least somewhat insane, kind of unhinged. That was kind of what I was expecting. What we saw was a speech that was relatively normal and relatively less unhinged, in my view at least, for Trump. And I think one of the things that you bring up there is there was a lot that he didn't say, and it seemed that he was actually weaving around all of the things that seemed to be going wrong for him. The economy would be an interesting one.