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

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.

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:

"The arms race between Microsoft, Amazon and Google is thus game theoretic. Every time Microsoft escalates, Amazon is motivated to escalate to keep up. And vice versa. We are now in a cycle of competitive escalation between three of the biggest companies in the history of the world, collectively worth more than $7T."

Basically, the AI arms race is currently being driven by the fear of being left out, which leads companies to believe they have to outspend each other to remain competitive in the current cutthroat environment.

Of course, this view is primarily defensive in nature. Corporate behemoths - entities that are literally swimming in cash and can afford large write-offs - are aggressively posturing in the AI infrastructure arena to better protect their proverbial turf and competitive advantage from being encroached upon by rivals.

To a lesser extent, perhaps, unbridled AI optimism is also fueling explosive growth in CapEx. After all, the more you believe that innovation in the AI sphere will outpace the current rate of building the physical infrastructure, the more you will spend to remain competitive.

Given the recent comments from the CEO of Google and Meta, we do not believe that this AI arms race is about to end anytime soon. Consequently, the ongoing weakness in NVIDIA and other Magnificent 7 stocks is likely to be transitory, at least until these mega caps stop trying to outspend each other.

About the author: Writing is my one incontrovertible passion. Over the past six years, he has authored over 2,200 distinct articles on financial and tech-related topics, spanning nearly 1 million words. And he has been a member of Wcctech mobile team since 2025. As an alumnus of the University of Toronto, Rotman Commerce Program, I bring nuance, in-depth knowledge, and a unique perspective to every topic that I cover. When I'm not writing, I'm traveling the world, exploring hidden confectionaries and restaurants as an aspiring food connoisseur.

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