On February 27, according to CNBC, Nvidia’s strong financial report clearly shows that the company is still firmly in the lead in AI chips. So why are the company's shares still falling in Thursday's trading? As of Thursday's close, Nvidia's stock price fell 5.5% to close at $184.89, and its stock price has been basically flat so far this year.
Cramer
Jim Cramer, a well-known CNBC financial commentator, said the reason is that investors are worried that Nvidia's largest customers cannot continue to spend at such a rapid pace unless they start to see a significant increase in profits from their AI efforts.
"There's a view that what we really care about, or should care about, is how much Amazon borrowed, how much Microsoft borrowed, how much Meta borrowed, and are they going to end up not making money?" Cramer said Thursday on "Squawk on the Street."
Cramer pointed out that "this is a suspicion of Nvidia's customers, not a suspicion of Nvidia itself." Amazon, Microsoft, Meta and Google parent Alphabet, often referred to as super-scale cloud service providers, have released higher-than-expected capital spending outlooks in their recent earnings reports. Total spending by these companies is expected to be about $700 billion this year.
Nvidia shares fell more than 5%
However, such aggressive spending plans are putting pressure on their free cash flow. Free cash flow refers to the money a company has left after paying expenses and buying equipment, which it can use to pay down debt, pay dividends, buy back stock and invest in growth.
Amazon's free cash flow is expected to turn negative in 2026, according to Wall Street estimates compiled by FactSet. Alphabet's free cash flow is expected to decline 64% year over year to $26 billion. Meta's free cash flow is expected to decline 86% to $6.1 billion. Microsoft is a relative exception. For the year ending in June, analysts expect free cash flow to be roughly flat at $71.3 billion compared with the same period last year, according to FactSet.
During an earnings call Wednesday night, Nvidia CEO Jensen Huang was asked if he was confident customers could continue to increase capital expenditures. "I'm confident in their cash flow growth," he said. "The reason is simple. We are now seeing a turning point in agent AI and the value of agents being used in enterprises around the world. Because of this, you are seeing incredible computing needs. In this new world of AI, computing power is revenue. We are generating profitable tokens that are effective for customers and profitable for cloud service providers."
Ultimately, Cramer said, Thursday's share price swings boiled down to this: "Customers have no choice. They have to spend. And then you might say, but they might not have enough money. Well, there comes a stage where they have revenue but no profit. But they don't dare not spend."