Nvidia, the top manufacturer of AI chips in the world, recently released a stellar earnings report that would make most companies envious. In the second quarter, sales increased by 122%. Profits increased by double. The forecast for this quarter? strong.
In short: The results were outstanding.
However, Nvidia’s stock (NVDA) fell 7% and continued to decline on Thursday following the company’s Wednesday night earnings announcement. That’s not much to worry about for a stock that has increased by over 150% this year.
Nevertheless, Wall Street is more to blame for the decline than Nvidia itself.
The truth is that Wall Street has spent the better part of the last 18 months fully committed to the AI hype train. Investors are pouring money into AI projects wherever they see potential for profit.
The company that formerly produced relatively specialized computer chips, Nvidia, has benefited the most from that spending binge. The stock has increased by about 3,000% in the last five years. Pronounced “en-VID-eeyah,” the company has capitalized on the hype to rank among the world’s most valuable brands with a $3 trillion valuation, ranking it alongside industry titans like Apple and Microsoft.
Nvidia’s quarterly earnings reports have taken on a Super Bowl-like quality of their own, spawning their own watch parties, memes, and endless feverish commentary, given their centrality in the AI narrative. Every time the company has reported over the last year and a half, it has exceeded expectations by a country mile, effectively teaching Wall Street to expect the unexpected.
However, when Nvidia’s earnings were announced on Wednesday afternoon, a sombre mood descended. Indeed, Nvidia beat predictions. However, despite how cliché this may sound, it was anticipated to surpass expectations. And did it really surpass everyone’s predictions by the same amount?
Wall Street appeared to have purchased tickets for the hottest Broadway production, only to discover upon arrival that understudies were portraying the leads. Despite this, the show was excellent, showcasing an incredible array of talent that was deserving of widespread acclaim. However, the magic of the original cast was somehow lost on it.
Investors in Nvidia were troubled by more than just that hint of disappointment, though.
Return on Investment for AI?
Wall Street is (finally) becoming a little more realistic about the true worth of the technology and, more importantly, how it will actually generate revenue for the companies pushing it, as the initial excitement surrounding AI begins to wear off.
Investors are growing restless because big Tech still has little to show for the billions of dollars they have spent on AI.
While both ChatGPT and Google Gemini are impressive, they aren’t quite the game-changers that their hype suggests. Right now, all people really want from AI is a little less burdensome performance of routine tasks, but tech companies are pushing products that take human activities that are enjoyable, like painting or creating music, or writing fan letters to your child, and assign them to a bot.
For Nvidia investors, there is good news and potentially bad news.
While some on Wall Street believe the hype surrounding AI could be overblown, Nvidia is not a young company offering claims of a revolution in the field.
Nvidia is the manufacturer of axes and shovels if we view the AI craze as akin to a gold rush. Its products were helpful before artificial intelligence (AI) became a craze; gamers valued Nvidia chips decades ago, and they will continue to be helpful long after AI becomes whatever AI ends up becoming. (The upcoming internet? The subsequent dot-com boom? The apocalyptic horseman who comes in fourth? Select your own journey.)
During a call with analysts on Wednesday, Nvidia CEO Jensen Huang pointed out that the company’s chips power not only AI chatbots but also robotics, recommendation algorithms, ad-targeting systems, and search engines. Almost 90% of its total revenue is still generated by its data center business.
The potentially bad news: Even the biggest names in tech, like Google and Amazon, rely on Nvidia hardware because it is incredibly complex and difficult to replicate. That might not always be the case, though. Given that almost all of those large clients are vying to develop their own AI chips, those large clients may eventually turn into formidable competitors.
