Nvidia Earnings Show the Strength of AI Spending–and the Company

Nvidia Chief Executive Jensen Huang.
Nvidia Chief Executive Jensen Huang.

Summary

In a tech industry renowned for short-lived frenzies, some chip executives and analysts see the AI boom as increasingly sustainable.

Big tech companies are continuing to pour cash into artificial intelligence at a breakneck pace, and based on Nvidia’s earnings update Wednesday, much of it is going to the chip maker.

“This last year, we’ve seen generative AI really becoming a whole new application space, a whole new way of doing computing," Jensen Huang, Nvidia’s co-founder and chief executive, said Wednesday. “A whole new industry is being formed, and that’s driving our growth."

After a year of supercharged spending, in a tech industry renowned for short-lived frenzies, some chip executives and analysts see the AI boom as increasingly sustainable. While it is the talk of Silicon Valley and a priority for big tech companies, AI has yet to percolate through the corporate world and become ubiquitous in everyday life, suggesting further opportunities for the companies that can harness them.

“This is transforming everything about computing," Intel Chief Executive Pat Gelsinger said at a company event Wednesday.

For Nvidia, the strength of the boom was on full display Wednesday, when it reported quarterly sales of $22.1 billion and forecast another $24 billion for its current quarter, each more than triple their year-ago periods and ahead of Wall Street’s bullish expectations.

Fueling that growth, tech companies have continued to plow money into AI in recent months. Meta Platforms Chief Executive Mark Zuckerberg boasted in January that he was planning to buy billions of dollars worth of AI chips from Nvidia this year. Google recently rolled out a new, more powerful version of its Gemini AI system. Microsoft has its own AI assistant tools and has bought tens of thousands of Nvidia’s most advanced chips.

“Generative AI has kicked off a whole new investment cycle to build the next trillion dollars of infrastructure of AI generation factories," Huang said. “We believe these two trends will drive a doubling of the world data center infrastructure installed base in the next five years and will represent an annual market opportunity in the hundreds of billions."

Nvidia’s chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%. Nvidia’s shares have soared as a result, and the company is trading near a $2 trillion valuation, among the U.S.’s top five most valuable companies.

Nvidia’s shares rallied 11% in premarket trading Thursday and ignited technology shares globally overnight.

Jamie Zakalik, an analyst at asset manager Neuberger Berman, said big tech companies were being pushed by the competition to continue investing in AI, helping feed a wave that doesn’t seem close to stopping even though few have built profitable businesses out of it.

“AI is a really big deal," she said. “I don’t think it’s a hype cycle like with the metaverse a couple years ago. I think it could completely transform the way people interact with computers and the way a lot of people do their jobs."

AI’s surge began at the end of 2022, after OpenAI made its ChatGPT tool widely available. Public fascination with ChatGPT’s ability to generate humanlike language led to a flood of investment in OpenAI and spurred on its competitors. Improving sophisticated AI systems like ChatGPT requires increasingly large numbers of the chips Nvidia and its competitors make.

That trend might bode well for Nvidia’s sales trajectory. While many industry observers expect a slowdown in AI chips to come at some stage, the current rush by tech-company competitors to best one another in the AI race might overshadow the industry’s typical ups and downs for some time, Zakalik said.

“The build phase can be a lot longer and more substantial" than the usual cycles, she said.

Nvidia’s bid to stay atop the AI heap isn’t uncontested. Its breakout results have stirred its competitors, and they have made some inroads—including Advanced Micro Devices, which expects AI chip sales of $3.5 billion this year.

In the U.S., chip stocks are getting a boost from Nvidia’s outlook on the market. Arm rose 7%, AMD rose 6% and Intel rose 3% in premarket trading.

Even some of Nvidia’s biggest customers, wary of the company’s dominance in AI and healthy profit margins, are racing to make their own AI chips that could supplant Nvidia’s. They include Google, which has designed in-house AI chips since 2016; Amazon.com, which has also been making AI chips since 2019; and Microsoft, which unveiled its first AI chips last year.

Nvidia’s boom is largely dependent on a handful of those companies. Nvidia disclosed that 19% of its sales in its last fiscal year came from one end customer. It didn’t disclose the identity of the customer, but cloud-computing companies like Google, Amazon and Microsoft accounted for more than half of the revenue for its data-center division in its latest quarter, or over $9.2 billion.

OpenAI, which counts Microsoft as its biggest financial backer, is itself looking for ways to increase access to chips that power AI. Chief Executive Sam Altman has discussed with investors and government officials a build-out of AI-related infrastructure, including chip factories, that could cost as much as $7 trillion, The Wall Street Journal reported this month.

Nvidia’s early-mover advantage—the company began investing in AI more than a decade ago—has made it difficult to displace, though, in large part because of its head start in software. The company has developed a vast amount of software catered to healthcare and robotics, among other key applications of AI, and the tools it created to exploit the capabilities of its chips have become an industry standard.

“Software is fundamentally necessary for accelerated computing," Huang said Wednesday. “This is the fundamental difference between accelerated computing and general-purpose computing that most people took a long time to understand."

The results on Wednesday showed the company’s upward trajectory isn’t under threat soon, analysts said. Nvidia has challenges, Truist Securities analysts said in a note—including a slowdown in China sales due to U.S. export restrictions and higher demand for its chips than it can meet—but the company’s “structural growth position in AI is as strong as ever."

Following Nvidia’s earnings report, Ben Reitzes, an analyst with Melius Research, projected the company’s revenue to grow 77% in its current fiscal year to $107.9 billion. He raised his price target on the stock to $1,000 from a previous $925.

Write to Asa Fitch at asa.fitch@wsj.com

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