Even record sales don’t quite cut it with investors who now see AI in transition
The prodigious run-up in Nvidia’s stock price over the past two years has become a proxy for global appetite for AI.
So what? It’s on pause. The chip maker’s Q2 revenues of $30 billion, announced yesterday, were more than double the equivalent figure a year ago. In a market inflated more by hope than expectation, it wasn’t quite enough.
- The number beat analysts’ forecasts but not investors’ dreams.
- The industry is shifting from training AI models, in which Nvidia chips have no serious rivals, to deploying them, in which they do.
As a result there was a selloff of Nvidia stock yesterday. That prompted questions about whether the AI spending boom is running out of steam. It isn’t, but the shape of the boom is changing.
Behemoth. Nvidia was valued at a trillion dollars last May before soaring to $3 trillion this June. It now makes up roughly 6 per cent of the S&P 500’s overall value. No company in history has become so valuable, so fast. Its investors have made a fortune along the way, but any slow-down in sales growth creates the potential for huge volatility in the S&P 500.
Its outsized effect on Wall Street raises questions about:
- The competition. Nvidia dominates but it has challengers, and there’s plenty of capital chasing them. Groq, a chipmaker focused on ‘inference’ – deploying AI models on datasets they haven’t seen before – has just raised $640 million from investors. Chips for inference tend to be less costly than those used for training AI models.
- The customers. Nvidia’s clients, including Alphabet, Microsoft and Meta, are beginning to face questions about when exactly their investments in AI will reap benefits. Microsoft’s CFO Amy Hood has said data centre investments will yield “monetization over the next 15 years and beyond”. Alphabet’s CEO, Sundar Pichai, says the risk of under-investing is “dramatically greater than the risk of over-investing.” That sounds like a patient, long-term view.
So expect demand to remain strong, but as the market shifts to inference there may be an opening for cheaper chips. Those will include products being developed by Nvidia’s own customers including Tesla and Amazon Web Services.
China syndrome. Meanwhile, the new cold war is bad for business. US export controls restrict China’s ability to buy advanced semiconductors. Nvidia’s China sales slid from 26 per cent of the company’s total revenue two years ago to 17 per cent last year.
Nvidia is working on a version of its flagship new chip, Blackwell, that’s tailored for the Chinese market. But the export curbs have also spurred Chinese competitors: Huawei is working on a new AI chip.
About that chip. This week the company acknowledged production difficulties with Blackwell but said it would increase production later this year. That will be closely watched as an indication of whether Nvidia’s astonishing growth can last.
Bubble flap. The speed of Nvidia’s rise has prompted comparisons with the dotcom bubble, which briefly made Cisco the world’s most valuable company. But unlike the aftermath of that bubble when orders for Cisco’s gear vanished, Nvidia’s customers have deep pockets and look committed to maintaining their spending.
Secrets of success
- Nvidia isn’t just a chipmaker. It also sells software that lets its chips be used in a wide range of applications.
- It has an unusually flat and open management structure. Founder and CEO Jensen Huang has no regular scheduled one-to-one meetings with any of his direct reports.
Instead, he sets strategic direction for the whole company, then adjusts according to feedback. He asks employees to email him the ‘top 5 things’ on their mind to judge whether the company is moving in the right direction.
Mystery of succession. Nvidia’s problems look fixable, and its dominance of the market looks hard to assail. But who succeeds Huang, one of tech’s longest-serving CEOs? There is no obvious heir.
