Nvidia earnings could turn around struggling AI business

The AI ​​business has lost its luster of late. Shares of Alphabet (GOOG, GOOGL), Amazon (AMZN) and Microsoft (MSFT), three of the biggest players in AI, have all fallen over the past month, with Alphabet, Google’s parent company, down 14%, Amazon down about 8% and Microsoft down more than 7% as of Thursday.

The stock moves come after companies including Meta (META) confirmed they will continue to pour billions of dollars into building AI infrastructure over the coming quarters — without offering much insight into when all that spending will translate into revenue. That, coupled with recent market turmoil, has weighed on AI stocks.

But the AI ​​powerhouse, Nvidia (NVDA), has yet to report earnings. The chip company’s performance could transform the AI ​​business more than any other. Unlike those software companies, revenue has not been a problem for Nvidia. However, if it falls short of Wall Street’s already high expectations, it could drag AI down with it.

Nvidia’s massive year-over-year gains won’t last forever

Alphabet, Amazon and Microsoft’s AI spending may be putting off investors, but it’s helping Nvidia’s bottom line. The company’s Hopper AI chips are the hottest on the market, and the company is set to start ramping up production of its Blackwell line later this year.

The company controls 80% to 95% of the high-power AI chip market, According to ReutersThis means that every time a company says it’s spending on AI capabilities, it’s likely buying, or at least using, Nvidia processors.

But Nvidia’s second-quarter report also marks the beginning of what will be several quarters of tough year-over-year revenue growth comparisons. Q2 2024 Revenue Data center revenue was $13.5 billion, up 101% year over year. Data center revenue topped $10.3 billion, up 141%.

Each subsequent quarter has seen impressive annual gains for the chip giant. But the party won’t last forever. In its most recent quarter, Nvidia reported revenue of $26 billion, up 262% from the $7.19 billion the company reported a year earlier.

Wall Street analysts expect the company to report revenue of $28.6 billion in its upcoming second-quarter report, up 112% year over year. While that represents a huge increase in revenue, it’s not as impressive as the growth the company has seen in previous quarters. That could put some investors off.

Nvidia remains the bright spot in the AI ​​business

But that doesn’t mean Nvidia can’t keep making money, or that Wall Street doesn’t trust the company. As of Thursday, 66 analysts had given Nvidia stock a buy rating. Only seven had a hold rating, and just one had a sell rating.

The story continues

It’s safe to say that Wall Street has confidence in the company’s outlook. As UBS analyst Timothy Arcuri noted in a recent investor note, Nvidia’s chipmaker TSMC has been posting strong quarterly results in its high-performance computing segment. That would suggest that Nvidia is on track for another great quarter.

Unlike software companies, Nvidia is also benefiting from the fact that its products now deliver real, tangible benefits to its customers. Big data companies are working to get the company’s chips up and running as fast as they can to develop and run AI models. But AI software is still in a vague testing phase. Companies are implementing AI software for enterprises, but the impact on their employees’ productivity isn’t going to skyrocket overnight.

Moreover, experts say it will take years for AI-powered software like Microsoft’s Copilot or Google’s Gemini to generate real profits for enterprise customers, and while those companies are busy iterating on their products, Nvidia will continue to sell them hardware.

So, while the AI ​​trade may have taken a hit over the past month, its biggest winner will continue to go strong.

Email Daniel Howley at [email protected]. Follow him on Twitter at @Daniel Hawley.

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