A JPEG file of about 4MB can generate up to 300MB of memory. When it happens, an "Allowed memory size of 134217728 bytes exhausted" error occurs, and for the user, a broken icon appears. On Firefox it's a non clickable white square, which is an issue since the user can't even get the real image.

Moodle should display a default image when the thumbnail generation fails.
A solution would be to raise the memory at PHP level, but it can be dangerous for performances. For our Moodle we've decided to add a few "raise_memory_limit" at the right places (lib/gdlib.php, lib/filestorage/file_storage.php ).