Key Takeaways:

• Nvidia is evolving into a full systems company, with networking as a major new growth driver.
• Semiconductor cyclicality now stems from industry concentration, not traditional oversupply.
• AI CapEx is becoming a structural baseline, with fabless innovators critical to scaling efficiency.

Nvidia Q3 Earnings and the Semiconductor Supercycle

Nvidia Earnings: Systems, Not Just GPUs

Nvidia once again posted strong results, beating expectations even in the absence of China sales. The company’s guidance set a “high floor with a flexible ceiling,” reflecting rapid adoption of its Blackwell architecture. A key theme from the call: Nvidia is evolving from a pure GPU provider into a systems company. Networking stood out as the largest growth surprise, with entire racks of GPUs being connected as unified nodes, underscoring demand for high‑speed interconnects and power efficiency.

Despite skepticism around valuation, Nvidia still projects ~40% EPS growth over the next year¹, extraordinary for a company of its scale. Analysts have begun raising out‑year forecasts, reinforcing confidence in the long‑term growth trajectory.

Cyclicality Has Shifted: From Oversupply to Concentration

One of the broader takeaways from the quarterly call is that semiconductor “cyclicality” is no longer driven by demand but by competition. Historically, oversupply came from too many companies building the same products. Today, AI has pushed the industry into concentrated leadership, with Nvidia, Broadcom, TSMC, and a handful of others forming what has been described as an “oligopoly stack.” These dynamics bring greater capital discipline, tighter supply chains, and less volatility.

Historical Semiconductor Cyclicality Based on Supply/Demand Imbalance

Source: iFAST

CapEx: A New Baseline for AI

Capital expenditures from hyperscalers continue to be the backbone of AI infrastructure investment. Rather than being a temporary spike, CapEx is increasingly being viewed as a baseline operating cost. Companies are racing to future‑proof their infrastructure as token usage grows and applications broaden. Importantly, supply-side discipline is holding; TSMC and others are avoiding the trap of overbuilding, which keeps margins healthy.

TSMC Gross Margins 2009-2025

Source: Macrotrends.net, as of 06/2024. For illustrative purposes only. Past performance is no guarantee of future results

The Role of Fabless Innovation

Fabless semiconductor companies continue to play a critical role as optimizers rather than competitors to Nvidia. They address bottlenecks in power management, interconnectivity, and efficiency, enabling hyperscalers to scale data centers effectively. Examples include firms like Astera Labs, which builds high‑speed connectivity solutions integrated into hyperscaler and GPU ecosystems.;

This positioning highlights the complementary nature of VanEck’s SMH and SMHX ETFs: SMH captures the concentrated leaders across the stack, while SMHX emphasizes the fabless innovators solving the next layer of AI infrastructure challenges.

Beyond Hyperscalers: Expanding Demand Drivers

While hyperscaler CapEx remains the most visible demand engine, three additional demand layers are accelerating:

• Internal demand: cloud providers improving their own businesses (e.g., Meta).
• External demand: enterprises adopting cloud AI services (Google has highlighted under‑investment risks here).
• Application demand: a new “trust‑based” layer of AI adoption in regulated fields like healthcare and law, requiring factual, reliable compute.

Nvidia Revenue by Geographic Region 2017-2025

Source: Nvidia, as of February 2025. Past performance is no guarantee of future results.

These expanding drivers reinforce that the AI supercycle is still in its early innings, with semiconductors as the backbone of growth.

Final Takeaway: A Durable Innovation Flywheel

The Q3 discussion reinforced that AI demand is not only persisting but also broadening across sovereigns, enterprises, and applications. Nvidia may lead headlines, but the story is one of diversified winners. For investors, pairing SMH with SMHX offers exposure to both the market‑cap leaders anchoring the stack and the design‑driven innovators enabling efficiency and scale.

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