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The generative AI hype bubble runs through Nvidia

Nvidia is powering Wall Streets AI hype train.

This article was first featured in Yahoo Finance Tech, a weekly newsletter highlighting our original content on the industry. Get it sent directly to your inbox every Wednesday. Subscribe.

Wednesday, May 31, 2023

When it comes to AI, it's all about Nvidia

Generative AI is the hottest trend on Wall Street. Ever since OpenAI’s ChatGPT debuted in late 2022, kicking off a flurry of activity in the space, investors have been piling into AI stocks. And Nvidia (NVDA) has been the biggest winner.

On Tuesday, the company became the first chipmaker to hit a $1 trillion market cap, before settling back below the mark, thanks to a massive runup on its share price after announcing it anticipates second quarter revenue well above Wall Street’s expectations.

It’s not just Nvidia’s earnings, though. The company has been working in the AI space for years, thanks to the fact that the graphics processing units (GPUs) it originally developed for video games also happen to be uniquely suited for running multiple processes at the same time.

That means companies can develop and run algorithms that would otherwise take far longer using traditional central processing units (CPUs). And no other chip maker can match Nvidia’s capabilities. It provides everything from the chips to the servers to the software necessary to train and deploy AI models.

And because it’s the tech industry’s go-to for GPUs powering AI systems, Nvidia is blowing up like never before. But it’s also put the company at the center of the generative AI hype bubble.

“As an investor, I get concerned when I see these big jumps,” Michael Arone, chief investment strategist at State Street Global Advisors, told Yahoo Finance Live on Tuesday.

TAIPEI, TAIWAN - 2023/05/29: Nvidia president and CEO Jensen Huang enters the stage while waving to the audience at a keynote presentation at COMPUTEX. The COMPUTEX 2023 runs from 30 May to 02 June 2023 and gathers over 1,000 exhibitors from 26 different countries with 3000 booths to display their latest products and to sign orders with foreign buyers. (Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images)
Nvidia president and CEO Jensen Huang takes the stage at a keynote presentation at COMPUTEX. (Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images)

“I think we’re getting ahead of ourselves in terms of the opportunity. But I think that will begin to take shape,” he added.

The future of generative AI is still cloudy

Companies with any ties to generative AI have been on a tear in recent months, as technologists and executives alike promote the technology’s future potential.

Microsoft, which is investing billions in OpenAI, and Google parent Alphabet, which is rolling out generative AI products of its own, have certainly benefited from the gold rush— shares of the firms are up 38% and 40% year-to-date, respectively.

Microsoft (MSFT) CEO Satya Nadella says generative AI will upend the search engine business. Alphabet (GOOG, GOOGL) CEO Sundar Pichai is going all in on the technology, with generative AI touching Google Search and Android. And Nvidia CEO Jensen Huang says AI is having its iPhone moment.

Those are some heady declarations. And so far, there have been some incredibly interesting use cases for generative AI. Search is certainly one area that’s set to improve, as evidenced by Microsoft’s Bing and Google’s Search Generative Experience. Microsoft’s Word and Google’s Docs also get a nice bit of help from generative AI, as well.

MOUNTAIN VIEW, CALIFORNIA - MAY 10, 2023: CEO Sundar Pichai speaks at the Google I/O annual developer conference at the Shoreline Amphitheater in Mountain View, California on Wednesday May 10, 2023. (Melina Mara/The Washington Post via Getty Images)
MOUNTAIN VIEW, CALIFORNIA - MAY 10, 2023: CEO Sundar Pichai speaks at the Google I/O annual developer conference at the Shoreline Amphitheater in Mountain View, California on Wednesday May 10, 2023. (Melina Mara/The Washington Post via Getty Images)

But exactly how those executives’ predictions play out across the broader economy is still very much up in the air. Part of that will have to do with just how much more productive AI makes us, explained eToro investment analyst Callie Cox.

“When it comes to AI…right now we’re in the hype stage. We’re trying to understand how much of this is real,” Cox told Yahoo Finance Live.

“For [AI] to be like the second coming of the internet or something that could take hold like the internet did, I think we need to see gains in productivity. Otherwise this could be an exciting technological innovation that fizzles out a little bit earlier than one expected.”

Generative AI is just one type of artificial intelligence that companies across industries are using. Chances are you use the technology today when you get an autocomplete suggestion for an email address or a recommendation while browsing for food on your favorite delivery app. Businesses, meanwhile, use it to predict future sales. In other words, AI encompasses a vast array of technologies.

The hype machine would have you think that generative AI is the be-all and end-all for the category. But that’s unlikely to be the case in the long term. And while Nvidia will undoubtedly benefit from the continued growth in AI, Wall Street’s focus on anything related to generative AI could end up being short sighted.

“I think you’ll continue to see anything with the generative AI label continue to do pretty well here at least for this year, probably into the first half of next year,” Arone said. “It won’t be for a little bit until you start to see the wheat separated from the chaff.”

Daniel Howley is the tech editor at Yahoo Finance. Follow him @DanielHowley

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