Will Jensen Huang be able to dispel fears about the AI industry? We’ll find out soon.
The $113 billion Nvidia CEO is set to make a big announcement on Wednesday that will cap off the summer earnings season for big tech companies as the company prepares to report second-quarter earnings at a volatile time for the AI sector.
Nvidia briefly became the world’s most valuable company in June and enjoyed a golden moment, but since then the company and its customers have taken a beating as investors have become fixated on the reality question: Does reality match the hype?
The Santa Clara-based company is, of course, one of the surest bets for investors looking to profit from the generative AI boom, with its shares up an astounding 168% this year and a valuation approaching $3.2 trillion.
Demand for the company’s chips, or GPUs, has been robust as big tech companies work to build increasingly powerful AI models that drive transformative change. Nvidia posted record revenue of $26 billion last quarter.
That said, there are two good reasons why investors seem spooked.
Hype vs reality
The first reason is simple: Several big tech companies have said in recent weeks that investors are concerned that their AI infrastructure investments, many of which are in Nvidia, are unlikely to produce big returns anytime soon.
Google first sounded the alarm bells when, during an earnings call in late July, Chief Executive Officer Sundar Pichai struggled to answer an investor question about the impact of AI on revenue.
While Pichai said “the risks of underinvestment are significantly higher than the risks of overinvestment,” it was hard for investors to ignore the fact that capital spending was surging last quarter, nearly doubling from the same period a year ago to $13 billion.
Nvidia CEO Jensen Huang is one of the richest people in the world. NVIDIA
It was a similar story at Microsoft, which reported earnings a few days later: Despite revenue rising 15% year over year to $64.7 billion, CFO Amy Hood told analysts the company expects to see benefits from AI “for the next 15 years and beyond.”
For those who support the long-term prospects of AI, the patience required will be worth it.
Wedbush analyst Dan Ives called Hwang “the godfather of AI” and predicted Wednesday’s earnings report would be “another mic-drop moment for the tech world” as Nvidia talks about demand through 2025.
Bubble Region
But not everyone feels that way, which is the second reason investors are worried: A growing number of investors have a hunch that the overall AI market is in a bubble.
Earlier this month, the Financial Times reported that hedge fund Elliott Management had told investors that Nvidia’s shares were “overvalued” and that it was “skeptical” of continued demand from big tech companies for GPUs.
A June report from Goldman Sachs also suggested the industry was in bubble territory: Jim Covello, head of global equity research at the bank, said that “the collapse of the current AI bubble may not be as big a problem as the dot-com collapse” given that companies investing heavily in AI are “well-capitalized,” but that it could become an issue if “there are fewer use cases for AI and adoption rates are lower than current consensus expectations.”
Returning to Nvidia, the short-term fears should fade if the company predicts chip demand will remain as strong as it has been, signaling that its customers are still determined to build industry-disrupting, profitable AI.
But anything else could mark the beginning of a much more difficult chapter in AI’s history.