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The world’s leading manufacturer of AI chips, Nvidia, has just released a strong earnings report that most companies would be jealous of. Sales rose 122% in the second quarter. Profits doubled. The outlook for the current quarter? Strong.
In short, the numbers were fantastic.
Still, Nvidia (NVDA) shares fell 7% after the earnings release Wednesday night and remained in the red Thursday. For a stock that’s up more than 150% for the year, that’s no cause for concern.
However, the decline says more about Wall Street than about Nvidia.
Here’s the thing: Wall Street has been on board the AI hype train for nearly 18 months. Wherever investors see potential AI gains, they throw their money in.
Nvidia, once a relatively specialized computer chip maker, has been the biggest beneficiary of this buying spree. Over the past five years, the company’s stock price has risen by about 3,000%. de-VID-eeyah) has ridden the wave of hype to become one of the most valuable brands on the planet. With a valuation of three trillion US dollars, the company is now on par with giants like Apple and Microsoft.
Given Nvidia’s central role in the AI story, its quarterly reports have taken on a Super Bowl-like quality, spawning their own watch parties, memes, and endless feverish commentary. Over the past year and more, the company has managed to beat expectations by a wide margin on every report, essentially training Wall Street to expect the unexpected.
But on Wednesday afternoon, when Nvidia’s results were announced, a certain boredom set in. Yes, Nvidia exceeded expectations. But – and we know how this sounds – it was expected to exceed expectations. And did it really exceed expectations as much as they expected?
It was as if all of Wall Street had bought tickets to the hottest show on Broadway, only to find that all the lead roles were played by understudies – a great show, a phenomenal parade of talent on stage that deserved all the applause. But it just didn’t quite have the magic of the original cast.
However, this hint of disappointment was not the only thing that weighed on Nvidia investors.
As the excitement over the initial hype surrounding artificial intelligence slowly dies down, Wall Street is (finally) becoming a little clearer about the true value of the technology and, more importantly, how it will actually generate revenue for the companies that market it.
As my colleague Clare Duffy wrote earlier this month, despite spending billions on AI, big tech companies still have relatively little to show for it, and investors are starting to get nervous.
We have ChatGPT and Google Gemini, which, while quite impressive, don’t exactly offer the groundbreaking innovations they claim to. All anyone wants from AI right now is that it makes mundane tasks a little less tedious, but tech companies continue to release products that delegate the fun side of being human – like writing fan letters with your child or playing music or painting – to a bot.
There is good news and possibly bad news for Nvidia investors.
There are people on Wall Street who think the AI craze is a bubble about to burst. But Nvidia is not a young start-up promising an AI revolution.
If we think of the AI hype as a kind of gold rush, Nvidia is the company that makes axes and shovels. Its products were useful before AI became hype—Nvidia chips were already popular with gamers decades ago—and they will be useful long after AI becomes… whatever AI becomes. (The next internet? The next dot-com bubble? The fourth horseman of the apocalypse? Choose your own adventure.)
As Nvidia CEO Jensen Huang noted on a conference call with analysts on Wednesday, the company’s chips are used not only in AI chatbots, but also in ad targeting systems, search engines, robots and recommendation algorithms. The company’s data center business still generates nearly 90% of total revenue.
The potentially bad news: Nvidia makes hardware that’s incredibly complicated and difficult to replicate, which is why even the biggest names in tech, including Google and Amazon, depend on them. But that doesn’t always have to be the case. Those big customers could eventually become big competitors, as virtually all of them are vying to build their own AI chips.
