Game Theory Suggests NVIDIA’s ~$500 Billion Valuation Blow Doesn’t Mean Any Apparent AI Bubble Has Popped

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With NVIDIA, the indisputable poster child of the ongoing AI mania, down to its lowest price level in around two months earlier today, skeptics came out of their prolonged slumber to gleefully pronounce that the AI bubble had popped. Yet, the escalating CapEx underpinned by game theory suggests otherwise.

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Following a ~15 percent correction (from a peak of roughly $3.335 trillion in June to $2.820 trillion as of recent data) in NVIDIA shares amounting to ~$530 billion market cap loss, and an aberrant weakness in the rest of the Magnificent 7 grouping of mega cap stocks, not to mention the ongoing rotation from the tech-heavy Nasdaq 100 index into small cap stocks, some analysts have been quick to pronounce the death of the so-called AI bubble. These skeptics include Hargreaves Lansdown's head of equity funds, Steve Clayton.

At the heart of this bearish prognosis lies the disconnect between soaring AI-related CapEx and its minimal impact on revenue acceleration. In fact, this disconnect was recently hammered upon by Goldman Sachs itself when it asked a tough yet pertinent question: where are the benefits from unbridled growth in AI-related CapEx? Goldman cited Daron Acemoglu, a professor at MIT, who proclaimed that AI will impact less than 5 percent of all productive tasks in the US in the next 10 years.

Yet, on the flip side, corporate mega behemoths simply refuse to slow down their AI-related spending. In fact, in the past few hours, the CEOs of Meta and Google have both hammered home their fear of being left behind in the so-called AI arms race should they scale back spending.

This persistence of sorts can be better understood in the context of a game theory analysis by Sequoia Capital:

Basically, the AI arms race is currently being driven by