Opinion: Nvidia is seeing a generative-AI boom, but don’t bet on it spreading to the rest of tech

Calling that leap sudden would be an understatement: Profit more than doubled sequentially and jumped more than nine times from the same quarter last year, while revenue nearly doubled from the previous quarter and surpassed Intel Corp.’s
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quarterly sales for the first time. And the blowout forecast calls for more big gains in the current period.

Full earnings coverage: Nvidia’s stock soars after AI boom pushes chip giant to record results, blowout forecast

There is no doubt that Nvidia’s startling gains are from generative AI, the technology exemplified by OpenAI’s ChatGPT that has created fervor in an industry hungry for a new focus other than a pandemic tech boom fizzling and ending more than a decade of strong growth. Where there is, or at least should be, doubt is in the breadth of the boom beyond the hardware Nvidia sells for generative AI.

“All the money right now is in the hardware,” Maribel Lopez bluntly told MarketWatch on Wednesday.

Software companies are frantically trying to access Nvidia gear to develop their own next-generation versions that leverage generative AI, but there are no guarantees huge returns await them. Lopez, a tech industry analyst and founder of Lopez Research, noted that Microsoft Corp.
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is attempting to charge $30 a user for its co-pilot software using OpenAI’s technology, but she said its “unclear as to whether that dog hunts right now.”

“I think everybody in the industry is waiting to see if [Microsoft] can layer economic dollars on top of adding gen-AI in their software stack,” she said. “Right now, nobody has proved they can do that yet. If nobody can do it in software, the only people who are making any money in the short term are hardware guys.”

There will also be some money made by the large cloud providers, such as Microsoft, Alphabet Inc.’s
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Google and Amazon.com Inc.’s
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AWS, which will be selling cloud access to the technology needed for generative AI. But those are also some of the biggest buyers of Nvidia’s in-demand equipment, which could mean they are pushing money out the door faster than they bring it in, a dynamic Microsoft in particular has warned about.

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And the fact that most of the companies developing gen-AI features for their software are using the same types of cloud services is another reason to doubt a widespread boom in fresh revenue across the tech sector.

“Everybody has generative AI now, [but] there’s a tremendous amount of time spent figuring out do you have anything that creates a barrier to entry to make your product successful over the others,” said Lopez, who consults with tech companies on these issues. “Right now, there aren’t a lot of barriers to entry, because most people are using a large foundation model in the cloud, which everyone else has access to.”

“This is a technology that will change every piece of software on the planet …. but we haven’t gotten to the other side yet, and that will take years,” she added.

Even bullish Wall Street analysts seem to agree. While Goldman Sachs analysts have named 11 tech companies that they believe will benefit in the near term from generative AI — including some software makers, such as Salesforce Inc.
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and Adobe Inc.
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-2.70%
— they admit that most gains are way down the road.

For more: Nvidia may be the AI stock for now, but here are the picks for later, says Goldman Sachs

“The timing of AI adoption is highly uncertain, but we expect AI adoption will likely
begin to have a meaningful macro impact some time between 2025 and 2030,” they wrote in a note earlier this week.

Those analysts also detailed other issues beyond just the time it will take for software companies and others to develop products that matter to their top or bottom lines. There are huge concerns around regulation and fights over access to data — OpenAI is already facing class-action lawsuits regarding the data used to train its system, and many entities are trying to build as many walls as they can to keep companies from using their data moving forward.

Everything adds up to a very limited opportunity in the short term, largely centered on Nvidia and other hardware players, and uncertainty in the long term for those without their own data streams or products with a true “moat.”

“I do think we’re a little gaga on generative AI, and I think in some cases that’s going to be a big nothing for a lot of people,” Lopez said. “To me, in order to have an AI opportunity in general, you have to be one of two things: You either have to be the people who are creating the hardware, the tools that make that AI happen, or you have to be the people that have the data.”

Nvidia deserves the attention it is receiving for recognizing such huge returns after betting big on AI more than a decade ago, and the chip maker’s long-term success does not require generative AI to live up to the hype. In an interview Wednesday afternoon, Nvidia Chief Financial Officer Colette Kress told MarketWatch that “generative AI was the ‘a-ha moment’ for enterprises to understand how AI works and how they can apply it,” but Nvidia will not live or die by its successful implementation.

“Is that all that we’re doing? Absolutely not,” she said, mentioning AI’s ability to discover new drugs and address important health issues, as well as to power some of the world’s most powerful supercomputers.

Nvidia’s AI capabilities are why it is suddenly a trillion-dollar company and headed higher. But be wary of jumping on any other tech stock in the belief that Nvidia’s success will transfer easily elsewhere.