Big players are determined to "burn money"! After a sharp drop, NVIDIA's volatility has exceeded that of Bitcoin

This week, the "AI leader" NVIDIA staged a roller coaster market performance, dropping by 7% at one point on Tuesday, only to surge nearly 13% overnight, increasing its market value by a staggering $330 billion in a single day. The US tech stocks also followed suit with their "ups and downs".

Currently, NVIDIA's volatility has even exceeded that of Bitcoin. Data shows that NVIDIA's 30-day option implied volatility has recently surged from 48% to 71%, while Bitcoin's DVOL index (a measure of 30-day implied volatility) has dropped from 68% to 49%.

Behind the extreme volatility lies the shadow of rising costs looming over the tech giants, with growing concerns in the market about the returns on massive AI investments.

As tech giants continue to release their financial reports, the results have shown high AI capital expenditures, but revenues have not far exceeded expectations, leading to corresponding scale growth. With dwindling market patience, tech stocks have taken a heavy hit.

In response, tech giants remain firm in their "burning money" strategy. AI investments are currently driving some performance growth, and more importantly, for them, AI investments are not just about pursuing incremental profits but have become a matter of survival. The risk of underinvestment far outweighs the risk of overinvestment.

Firm Commitment to "Burning Money"

Facing market concerns, tech giants have unanimously stated that they will firmly continue to "burn money".

Overnight, Meta released its second-quarter financial report, with revenue and profits exceeding expectations, capital expenditures for the quarter were lower than expected, and the upper limit of annual capital expenditures remained unchanged while the lower limit was raised by $2 billion.

At the same time, Meta emphasized that capital expenditures in 2025 will increase significantly, with infrastructure costs being a key driver, which will continue to support AI research and product development.

Similarly, Microsoft also firmly stated its intention to continue increasing AI spending. In the second quarter, Microsoft's capital expenditures increased by 77.6% year-on-year to $19 billion, almost all of which was used for AI-related expenses. The annual capital expenditures for the 2024 fiscal year exceeded the $50 billion mark.

Brett Iversen, Vice President of Investor Relations at Microsoft, stated that the company will continue to increase spending to meet "strong customer demand", with capital expenditures expected to exceed those of the 2024 fiscal year in 2025.

AI Investments Currently Driving Performance Growth

Regarding the issue of AI returns, tech giants also provided detailed explanations during their conference calls, alleviating some of the investors' concerns.

Taking Microsoft as an example, they focused on the growth that AI has brought to Azure. Microsoft stated that the number of Azure AI cloud service customers increased by nearly 60% in the last quarter, with average customer spending also on the rise.

Microsoft also explained that part of the reason for Azure's slowdown is due to GPU shortages. Microsoft mentioned that due to the high demand for AI GPU servers, the capacity of its Azure AI services has been constrained, a situation that will continue until the end of this year, clearly demonstrating strong enterprise demand for AI Secondly, Meta emphasizes how AI is driving the growth of its advertising business. Mark Zuckerberg stated during the earnings call that AI has improved the recommendation function, helping people find better content and making the advertising experience more effective. These products have already reached a large scale. In the second quarter, Meta's advertising revenue increased by 22%, double the growth rate of its competitor Google.

Analysts also mentioned that Meta's AI strategy has led to a resurgence from the lows of the past two years. Analysts stated that Meta used AI to rebuild its advertising technology stack, changed the user interface, increased user engagement, and now this is reflected in revenue and profits. Meta has indeed addressed some concerns and storms from a few years ago and has successfully integrated AI into their ecosystem.

In addition, Sundar Pichai, CEO of Google's parent company Alphabet, mentioned that the company analyzes every dollar of AI investment and sees the "tremendous momentum" brought by AI investments.

Against this backdrop, Alphabet and Microsoft increased their capital expenditures by 91% and 78% respectively in the most recent quarter, and have committed to maintaining active investments in the coming year, which seems reasonable.

Chip stocks continue to perform well

Tech giants' firm investment in AI will further increase hardware expenditures such as chips, bringing good news to NVIDIA and other chip companies.

Overnight, US tech stocks saw a big rebound, with NVIDIA up 13%, Broadcom up 12%, ASML ADR up 8.89%, and Qualcomm closing up over 8%.

Previously released financial reports have all shown that chip giants are benefiting from the accelerated growth of AI. AMD's second-quarter performance was outstanding, with data center revenue doubling, AI chip demand outstripping supply, and quarterly revenue surpassing $1 billion; TSMC's second-quarter performance also exceeded expectations across the board in terms of revenue, net profit, and gross margin.

TSMC CEO C.C. Wei stated that by the end of 2024, the company will increase the capacity of its advanced chip packaging technology CoWoS by more than double. However, even so, TSMC may not be able to meet actual customer demand until 2025 or 2026.

AMD CEO Lisa Su raised the 2024 revenue forecast for AI data center GPUs from the previous $2 billion to over $4.5 billion. She also pointed out that despite capacity increases in the second half of the year, the AI GPU supply chain will remain "tight" until 2025.

AI investment has become a survival issue

More importantly, concerns about the return on AI investments may overlook a key point:

This is not just about incremental revenue from specific AI features, but the entire restructuring of the computing platform, akin to the shift from mainframes to personal computers in the 1980s. In this new AI computing era, every company must upgrade its infrastructure to remain competitive.

For businesses, AI investment has become a survival issue, not just a pursuit of incremental profits. If competitors can provide better customer service through AI chatbots or develop products more quickly and comprehensively using AI design tools, companies that do not invest in AI will face serious challenges Deutsche Bank also pointed out in its analysis:

So far, revenue has been mainly limited to the cloud business field, where companies train and operate AI models.

However, beyond the cloud business, the signs of investment returns are more qualitative than quantitative, and the returns on AI investments are still difficult to measure in specific numbers.

These happen to echo the statements made by tech giants earlier, preferring to over-invest rather than under-invest, because falling behind in the tech industry means "having nothing at all."

Meta's CEO Mark Zuckerberg pointed out in a podcast: In order to ensure Meta's leading position in the field of AI, the company has spent billions of dollars to purchase NVIDIA's GPUs to develop and train advanced AI models. Because the consequences of falling behind mean that you will be at a disadvantage in the most important technologies in the next 10 to 15 years.

Google CEO Sundar Pichai also expressed a similar view: AI costs are high, but the risk of underinvestment is greater. Google may have over-invested in AI infrastructure, mainly including the purchase of NVIDIA's GPUs. Even if the AI frenzy slows down, the data centers and computer chips purchased by the company can be used for other purposes. For us, the risk of underinvestment far outweighs the risk of over-investment.

Overall, the latest round of financial reports in the AI frenzy provides support, indicating that AI prosperity is not only not declining, but may be accelerating