Nvidia can’t escape concerns about AI spending

The chipmaker, which has gone from a niche supplier of video-game components to a $3 trillion enterprise in just a few years, posted another round of strong results Wednesday. Its now-dominant data center segment increased revenue to $26.3 billion, more than 2½ times more than a year earlier. Adjusted operating income for the quarter more than doubled year over year to $19.9 billion. Nvidia’s total revenue and profit beat Wall Street targets, as did the company’s forecast for the current period ending in October.

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But the scale of those accomplishments fell short of what Nvidia has been delivering over the past year as its business has exploded on a wave of surging demand for AI capabilities from the world’s biggest tech giants. Investor expectations have risen along with it. Nvidia’s projected revenue of $32.5 billion for the current quarter ending in October was 2% above Wall Street’s target; the company’s forecast for the same period last year beat analysts’ consensus by 28%, according to FactSet data.

In addition, the new products Nvidia is building to outperform its competitors are growing significantly in complexity—which is putting a bit of a strain on the company’s gross margin line. But even that’s a bit nitpicky; Nvidia’s gross margin of 75.1% in the latest quarter was 3 points lower than three months earlier, but well above the 65% the company has averaged over the past four years. And even at 75%, Nvidia has a higher gross margin than all but one other company in the PHLX Semiconductor Index, according to S&P Global Market Intelligence.

In other words, Nvidia is doing well. Shares fell about 7% in after-market trading Wednesday after the company’s earnings report and conference call. That’s a small drop for a company whose market capitalization has more than quintupled in the past 18 months. But the gains have put Nvidia in the spotlight, befitting a company valued at par with Microsoft yet generating less than half the software giant’s annual revenue. The chipmaker with the funny name has quickly become a household name; Wednesday’s earnings conference call even sparked a watch party among investors and fans eager to follow the action.

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Such intense spotlights are rarely forgiving for long, especially given growing investor concerns about AI spending by Nvidia’s biggest customers. In their latest earnings reports, Microsoft, Amazon, Meta Platforms, and Google parent Alphabet reported combined capital spending of $58.5 billion for the June quarter alone — a 64% year-over-year increase. All four forecast spending would remain high this year and next, and all cited “AI infrastructure” as a key driver.

That was great news for Nvidia, which controls the lion’s share of the AI ​​chip market. But the sustainability of that spending remains an open question — especially if real demand for generative AI services doesn’t materialize at the pace tech optimists are currently predicting. Questions about the spending outlook dominated Nvidia’s earnings call on Wednesday. CEO Jensen Huang was confident, predicting that “the next year is going to be great.” With a market cap of $3 trillion, Nvidia’s biggest challenge these days is that great isn’t always good enough.

Write to Dan Gallagher at [email protected]