Wall Street's AI Code Cracked By Nvidia

Despite mixed quarterly results, the chip maker's climb can be extended by AI sentiment and spending.

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The chip manufacturer is at least very driven to demonstrate that all the chatter about Nvidia's NVDA 12.80%increase; green up pointing triangle chance in ChatGPT's universe is genuine.

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Since January 1 through Wednesday, Nvidia's stock price has increased 42%, outperforming the PHLX Semiconductor Index, which has only increased by 14%. The company's fiscal fourth-quarter earnings, which were largely anticipated to exhibit the same downturn in PC and data center expenditure that has afflicted competitors Intel and Advanced Micro Devices, were released ahead of schedule.

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According to analysts, Nvidia's revenue fell 21% year over year during the quarter that ended in January, marking the company's largest decline in almost four years.

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The buzz around the ChatGPT artificial intelligence conversation tool's success and the impending AI conflict between Google and Microsoft, however, outweighed any short-term concerns about Nvidia's business. Already, Nvidia is a significant provider to those businesses and other digital behemoths that provide cloud computing services.

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Online search using ChatGPT and other AI tools requires much more computer power than ordinary search activity, which could lead to Nvidia receiving even more capital funding.

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As Microsoft and Google made significant announcements earlier this month on the deployment of AI chatbot tools in their respective search engines, Jefferies analyst Mark Lipacis increased his price objective on Nvidia's shares by 22%.

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Clearly, the actual outcomes Nvidia provided on Wednesday afternoon did not correspond to that potential. Because some of its cloud customers "paused at the end of the year to reassess their construction plans," according to Chief Financial Officer Colette Kress, revenue actually decreased by 21% year over year, while data-center revenue of $3.6 billion came in 6% below Wall Street expectations.

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The company's second-largest industry, videogaming, however, surprised analysts by rebounding from the previous quarter's fall and outperformed expectations by 15%. Data-center sales growth is anticipated to pick up speed beyond the current quarter, Ms. Kress continued, which was welcome news for several analysts who had predicted that weakness would last at least into the first half of 2023.

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Investors felt confident holding onto a chip stock now priced at more than 50 times forward profits after hearing the upbeat prognosis and the company's introduction of a new cloud-based software business. Shares of Nvidia increased by more than 14% on Thursday morning.

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The optimism towards AI is well-founded. AI chatbot-based search's implementation won't be easy; Microsoft has already put restrictions on the new Bing before it goes live because of some odd reactions noted by early reviewers. Even if they cut back on other capital expenditures, Microsoft and Google are committed to the change and will make the necessary investments to outfit their networks.

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The new software sector gives Nvidia yet another way to capitalize on the enormous collection of AI software tools it has amassed over the years. The service would be hosted and made available through the major cloud service providers, according to Chief Executive Officer Jensen Huang, simplifying the company's go-to-market strategy.

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Additionally, the move enables Nvidia to broaden its AI customer base beyond the wealthy tech behemoths that currently purchase its chips, which, according to Cowen analyst Matt Ramsay, supports Nvidia's "transformation from a GPU hardware company to an accelerated computing (hardware/software) platform provider"