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Nvidia (NVDA) advocates continue to say the AI revolution is still in its early stages, but big tech companies’ AI spending is already under scrutiny, highlighting the gap between the technology’s supposed world-dominating potential and the lack of meaningful investment returns for companies outside of Nvidia. (Fortune recently reported that employees at other big tech companies are starting to get jealous of so-called Nvidians.)
The issue was on full display during Nvidia’s earnings call, when several analysts asked CEO Jensen Huang how the company viewed questions about the industry’s huge capital spending that has led to speculative returns on AI.
The benefits are already reaping the rewards for Nvidia, a few other hardware companies and AI bulls, but for big tech companies and others, the results are less clear.
Can the hype around AI see the end of one cycle and the beginning of the next at the same time? It seems to depend on the timeline, and whether investors can stomach a retreat from exponential gains to merely linear progress.
On the back of Nvidia’s revenue slowdown (the company beat expectations but didn’t shatter them like it did in previous strong quarters), the appetite for AI investments seems far from sated.
But while it’s true that AI trading has become a far cry from the early meme-coin craze, the recent wave of scrutiny around AI spending registers as a slight recalibration rather than a paradigm shift.
Just look at OpenAI’s latest valuation: On the same day that Huang was answering stubborn questions about ROI, The Wall Street Journal reported that the AI darling that started all this was in fundraising talks, valuing the ChatGPT maker at more than $100 billion.
Valuations on par with those of Starbucks (SBUX) and BP (BP) suggest there’s plenty of fuss to go around, and nowhere near abandonment or retreat. Still, critics might say the financial excitement around OpenAI isn’t the most reliable measure of the viability of AI technology.
Meanwhile, the tech giants remain in investment mode. Despite all the talk about an unsustainable AI era, ballooning capital expenditures, and uncertain revenue streams, CEOs of major tech companies are all in on it. This goes a long way to explaining why Nvidia’s revenue grew 122%.
But it also highlights another mismatch between offering AI chips and promising innovative, unproven software that relies on those chips.Nvidia’s unique growth story hinges on its tech platform’s appetite for AI.
The story continues
Demand for Nvidia’s hardware continues to grow as tech companies blend their identities and spending with AI. At some point, though, investor dissatisfaction with tangible benefits could lead to a retrenchment that will hurt Nvidia. But for now, CEOs of major tech companies have bet so much on the AI casino that it’s hard to imagine why they would pack up and stumble home. Higher up in the organizational chart, sunk costs lose meaning. Chasing losses can be mistaken for perseverance.
Now that all the major AI companies have reported their results, it will be hard to know whether a volatile tech earnings season represents a buying opportunity or a shift toward a more rigorous assessment of AI’s true value until investment slows.
Hamza Shaban is a markets and economics reporter for Yahoo Finance. Follow Hamza at @hshaban.
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