Nvidia's Earnings Reveal Next Big Profit Pool in AI Boom

Nvidia's recent earnings report has shed light on the next big profit pool in the AI Boom. The company's margins may be declining, but this is not necessarily a warning sign. Instead, it indicates that demand for Nvidia's products is running higher than its ability to supply them.

The bottleneck trade has been a defining pattern of the AI Boom, with each bottleneck creating a new group of winners. From compute to memory and energy, companies have profited from these constraints by securing scarce supply or developing innovative solutions.

Nvidia's move into optical networking is critical in this context, as it highlights one of its own chokepoints. The company has committed billions of dollars to secure supply from Lumentum Holdings Inc. (LITE) and Coherent Corp. (COHR), indicating that it is worried about supply. Historically, investors have looked to the chokepoints for future profit pools.

As every company in the AI Boom pays a bottleneck tax, Nvidia's situation underscores the importance of identifying these constraints. Companies like Micron Technology Inc. (MU) and SanDisk Corp. (SNDK) are benefiting from this trend, as they possess pricing power due to their control over scarce components.