The artificial intelligence trade has lost some of its luster lately. Shares of Alphabet (GOOG, GOOGL), Amazon (AMZN) and Microsoft (MSFT), three of the biggest AI players, have fallen over the past month. Google parent Alphabet lost 14%, Amazon lost about 8% and Microsoft lost more than 7% through Thursday.
The price moves come after the companies, along with hyperscaler Meta (META), confirmed that they will continue to invest billions of dollars in building out their AI infrastructure in the coming quarters – but without providing any further insight into when they will convert all that spending into revenue. This, combined with recent market turmoil, has put a damper on AI companies’ share prices.
But the most important component of the AI trade, Nvidia (NVDA), has yet to report its results. The chipmaker’s performance could give the AI trade more momentum than any other hyperscaler. Unlike those software firms, revenue has not been a problem for Nvidia. However, if the company falls short of Wall Street’s already high expectations, it could drag the AI trend down with it.
Nvidia’s huge year-on-year gains won’t last forever
Alphabet, Amazon and Microsoft’s AI spending may give investors pause, but it’s helping boost Nvidia’s bottom line. The company’s Hopper AI chips are the most in-demand on the market, and the company will begin production of its Blackwell line later this year.
According to Reuters, the company controls 80 to 95 percent of the market for high-performance AI chips. That means every time a company says it’s investing in AI capabilities, there’s a good chance it’s buying up Nvidia’s processors or at least using them.
However, Nvidia’s quarterly report also marks the start of several quarters in which comparing year-over-year revenue growth will be difficult. The company’s second-quarter 2024 revenue was $13.5 billion, up 101% year-over-year. Data center revenue exceeded $10.3 billion, up 141%.
In each successive quarter, the chip giant posted increasingly impressive year-over-year gains. But this party won’t last forever. Last quarter, Nvidia reported revenue of $26 billion, a 262% increase over the $7.19 billion the company reported the previous year.
For the upcoming second-quarter report, Wall Street analysts expect revenue of $28.6 billion, a 112 percent increase from last year. And while that’s still a huge increase in revenue, it’s not as overwhelming as the growth the company has seen in previous quarters. And that could scare off some investors.
Nvidia is still the bright spot in the AI industry
But that doesn’t mean that Nvidia won’t continue to make a lot of money or that Wall Street doesn’t approve of the company. As of Thursday, 66 analysts had given Nvidia shares a “buy” rating. Only seven had a “hold” rating and only one of them recommended a “sell.”
It’s safe to say that Wall Street has confidence in the company’s prospects. After all, UBS analyst Timothy Arcuri pointed out in a recent investor note that semiconductor maker TSMC, which produces Nvidia’s chips, reported strong quarterly results in its high-performance computing segment. That should suggest that another potentially stellar quarter for Nvidia is on the horizon.
Nvidia also benefits, unlike software companies, from the fact that its products now have real, tangible benefits for customers. Hyperscalers are adopting the company’s chips as quickly as possible to develop and run AI models. But AI-powered software is still in a foggy testing phase. Companies are implementing AI enterprise software, but it’s not as if its impact on employee productivity will skyrocket overnight.
Moreover, experts say it will be years before AI-powered software like Microsoft’s Copilot or Google’s Gemini really pays off for business customers. And while those companies are busy developing their products, Nvidia will continue to sell them its hardware.
While AI trading may have suffered a setback over the past month, its biggest winner will continue to hold strong.
Email Daniel Howley at [email protected]. Follow him on Twitter at @DanielHowley.
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