What Nvidia's Stock Says About the State of AI

0:00Today on the AI Daily Brief, what NVIDIA's stock price says about the state of AI. Before that, in the headlines, California has passed controversial AI regulation SB 1047. The AI Daily Brief is a daily podcast and video about the most important news and discussions in AI. To join the conversation, follow the Discord link in our show notes.

0:23Welcome back to the AI Daily Brief Headlines Edition, all the daily AI news you need in around five minutes. We kick off with some big news today where in California, the state legislature has approved SB 1047. The bill has a number of different provisions, some controversial, some less so. There is broad alignment around things like whistleblower protections, but a huge amount of debate around the core compliance provisions that it puts around model creators, as well as the potential downstream implications for open source developers. The bill has gone through numerous changes and updates, and proponents of it say that it's incredibly light touch.

0:57The bill picked up some momentum this week when Elon Musk came out in favor of it, although if you've been listening to my show, you know that there are many people who are somewhat skeptical of his support, or at least see personal motivations in it. Those who oppose the bill tend to have two big critiques. One is those implications for open source developers and the potential chilling effect it might have, and the second is a more fundamental disagreement about how much to worry about AI existential risk. The bill absolutely and undeniably has its genesis in the AI safety circles for whom those existential risks are the most important thing to focus on, while an interesting coalition of technologists on the one hand, and numerous politicians in D.C., including basically a big chunk of the California congressional delegation, are concerned about the bill's over-focus on those areas.

1:40Even in advance of the debate, it's clear that there's been a sense that it was likely to pass the assembly, and that the real battle was to see whether Governor Gavin Newsom would veto it. In terms of process, the state senate, which has already passed the bill, now votes again with new amendments, but this is largely considered procedural. From there, Governor Newsom has until September 30th to decide whether to veto or not. One note on the specific dynamics of the vote, while it passed with a clear majority in favor of it, 41 to 9, 41 out of 80 votes is actually the minimum to pass the chamber.

2:1041 pro votes is also far below the veto override threshold, which is 54 votes. Observers noted that a lot of moderate Dems just didn't vote. This creates potential cloud cover should Newsom decide that he wants to veto. But up to now, we really don't have any indications from the governor's office around how he's thinking about this. Moving on to our next topic, OpenAI is apparently back in talks for a new round of investment. An information piece earlier this week all about strawberries seemed to indicate that this might be the direction that OpenAI was heading. And frankly, it's been long enough that just in general, it was probably a safe assumption that the company was starting to think about its next round of investment.

2:45But now, as per the New York Times, the company is apparently in talks to raise money at a valuation of over$100 billion. If that's where the valuation came in, it would be a$20 billion increase from its valuation eight months ago, which is frankly a more moderate increase than some might have imagined at previous periods. Thrive Capital is said to be leading the round, planning to invest a billion dollars or more. What's not clear is if this is just a tender offer for employee shares, or whether it's that plus a normal investment round. Some of the details according to Bloomberg come from a memo from OpenAI CFO Sarah Fryer, which said that the company is seeking fresh capital without giving details.

3:22Staying in startup land for a moment, an interesting little nugget out of MidJourney, the company has been rumored to be exploring AI hardware, although exactly what it's thinking about hasn't been made clear. Well, now we have some confirmation as MidJourney tweeted yesterday, we're officially getting into hardware. If you're interested in joining the new team in San Francisco, please email us. Making light of the number of companies trying to create some sort of AI pendant wearable, Christopher Friant tweets, it's not going to be a pendant, right? Please say no. To which MidJourney responds, not going to be a pendant.

3:53Alas, for now, that is all the information we have, but I'm interested to see what you guys think. Use the comments to share what type of hardware you would like to see from MidJourney, and maybe also what type of hardware you think it might be. Another AI unicorn, Scale, made news with a recent round of layoffs. According to Inc., former contractors say that more than 1 ,000 workers were let go at Scale via email, but Scale says far fewer were impacted. Writes Inc. Contract workers at data annotation startup Scale AI were laid off Monday in a sign of persistent turbulence throughout the tech industry this year.

4:23The cuts were made quietly. According to sources who were affected by the layoffs, no official statement has been made by Scale leadership regarding the downsizing, and no additional information or context has been supplied to workers who were let go. According to two former workers, around 1 ,300 people were laid off, which was a number repeated in a Reddit thread about the downsizing. However, Scale AI's director of operations told Inc. that the number laid off was 61, not 1300. So obviously quite a big difference between what Scale is saying and what's being reported, which probably has a fairly significant impact on how much to read into this particular piece of news.

4:56Lastly today, after kicking up a ton of controversy earlier this year with its ahistorical image generation, Google Gemini will finally let you create AI-generated people again. Google says that the new upgrade, which is powered by their Imogen 3 model, will be rolled out to users over the coming days, and while they hope they won't get racially diverse Nazis anymore, Google is still blocking certain types of image generation, including photorealistic images of public figures. That is going to do it for today's headlines. Next up, the main episode. Today's episode is brought to you by Plum. Generative AI promises to supercharge your productivity and give you superpowers, but if you're not an engineer, trying to harness AI can be incredibly frustrating.

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8:06Welcome back to the AI Daily Brief. NVIDIA earnings calls have taken on a role previously reserved only for Federal Reserve press conferences. They are perhaps the most watched event on Wall Street at this point, and yesterday's was particularly weird. On the one hand, as you'll see, NVIDIA beat analyst expectations. However, the stock is weighed down on the basis of forward-looking projections, and in many ways interpretation of this is sort of a Rorschach test for how you feel about AI right now. So let's talk about what was reported first. The first wave of news all followed a theme similar to this one in The Guardian, NVIDIA Rides Big Tech's AI investment to beat Wall Street's sky-high expectations.

8:46NVIDIA's revenue in the past quarter was$30.04 billion. That's its highest ever and a 122 % increase from the year before. Analysts had anticipated$28.7 billion in revenue, so NVIDIA beat that in a significant way. The New York Times had a similar take with their piece titled, NVIDIA revenue jumps 122 % in positive sign for tech's AI boom. The Washington Post's NVIDIA results show AI boom continues despite recent bubble fears. The Times piece read, this summer, Wall Street and Silicon Valley began to question whether generative artificial intelligence could produce enough benefits to justify its staggering costs.

9:21But the chipmaker NVIDIA showed on Wednesday that enthusiasm for AI is still running hot. The post points out that the majority of NVIDIA's revenue came from sales to big tech companies like Amazon, Google Meta, and Microsoft. However, even though these earnings did beat analysts' expectations, there is still clearly an underlying concern. Said Investing.com senior analyst Thomas Montiero, while the numbers indicate that the AI revolution remains alive and well, the smaller beat compared to the previous quarter's adds to multiple warning signs across the tech space earlier in the earnings season.

9:49The Guardian also wrote, analysts welcome the results despite signs that NVIDIA's extraordinary sales growth might ultimately slow. Said Jacob Bourne, a technology analyst with eMarketer, the company continues to benefit from a market paradox. Big tech's aggressive AI investment strategies drive massive demand for NVIDIA's chips, even as these same companies invest in developing their own silicon. Now there are some specific NVIDIA-related issues that people are looking for. Once again, Born said, As competitors like AMD intensify their efforts, the timely release of NVIDIA's next-generation Blackwell chip will be essential for maintaining its dominant position in the increasingly competitive AI chip market.

10:22From Reuters this morning, NVIDIA's subdued forecast dampens enthusiasm in AI chip stocks after steady rally. Reuters writes, The company's shares were down 3.4 % after it forecast third-quarter gross margins that could miss market estimates and revenue that was largely in line. NVIDIA has crushed Wall Street's estimates for several quarters on surging demand for AI chips, leading investors to bank on the company's penchant for routine blowout forecasts. The stock's strength has been a pillar of the market's rally through both this year and the past year, leading to what some say are ultimately insurmountable forecasts.

10:52Summing that position up is J.J. Kinahan from IG North America, who wrote, They beat, but this was just one of those situations where expectations were so high, I don't know that they could have had a good enough number for people to really be happy. The BBC points out that while analysts have grown used to NVIDIA producing spectacular sales growth, the latest results indicate that the rate of growth was starting to slow. Said Matt Britsman, senior equity analyst at Hargreaves Lansdown, it's less about just beating estimates now. Markets expect them to be shattered, and it's the scale of the beat today that looks to have disappointed a touch.

11:20A Thursday morning piece from the Wall Street Journal really summed up the shifting sentiment. NVIDIA, they wrote, can't escape shadow of AI spending fears. Strong results from Chipmaker don't ease worries about durability of big tech's AI investments. So what are those concerns? Well, we frequently discussed influential pieces like Sequoia partner David Kahn's AI's$600 billion question blog. Kahn himself tweeted yesterday, NVIDIA was asked our$600 billion question on Q2 Call. Where is the customer's customer's revenue? Their answer? One, traditional workloads will move from CPU to GPU. Two, chat GPT and coding AI.

11:53Three, meta saves dollars using GPOs for algorithms. Four, countries buying GPUs. Is this enough to justify the hype? Holding aside the weirdness of Sequoia being one of the main cheerleaders of a hype call, I do think that this is the central question. And the thing that Wall Street is struggling to figure out is how should they value a company that is clearly doing well, that is the market leader in the most important segment of the market, that continues to see strong demand, but where there is a sense that the ROI of the companies that are buying NVIDIA's product might never come to pass. For many who continue to be bullish, it comes back to what Thomas Montiero wrote, investors should not fear a deeper sell-off.

12:30The massive growth in data center chips shows that companies worldwide still have no other option but to keep ramping up their AI expenses regardless of the costs. And this is the point, of course, that venture capitalist Sarah Tavell made recently in her blog post, that the simple fact of the matter is that the hyperscalers are going to continue to invest incredible amounts of money to build out their AI infrastructure. They believe and have articulated over and over again that they believe that underinvestment is by far more concerning than overinvestment. And what's more, those companies have big, healthy balance sheets.

13:00Even overspending on AI isn't likely to hurt them, except perhaps in the eyes of Wall Street investors. Now, none of this is to say that Nvidia and the Magnificent Seven's stock prices have to stay the same. Wall Street gets to decide if it wants to handicap the potential of a bubble by decreasing the price of these shares. That's exactly what Wall Street is supposed to do. It's supposed to figure out how to interpret all the signals. These ones are just really complicated because they don't follow previous patterns. Radnor Capital had a thoughtful post on Twitter, writing, I think there are two simple but important questions to ask when trying to assess the durability of NVIDIA's business model.

13:31One, will model scaling laws hold, meaning does more compute lead to better model performance and ultimately more use case productivity and cost savings? The answer right now is yes, and I don't see any evidence that this is changing. Two, will NVIDIA's market leadership persist, not only in market share, this is a given for the immediate term, but in product performance, obviously goes hand in hand with market share long term, and their ability to get systems embedded within their customers? The answer right now is yes, and I don't see any evidence that this is changing. The arms race continues as frontier model makers race to the next plateau to establish market leadership, and NVIDIA remains the leading accelerator option on the market.

14:05No signs of AI CapEx slowing. An important long-term risk factor is whether we have fewer frontier model companies in the future. Next-gen models will require multiples of the compute of current generations, but there may not be as many. It's too early to tell, and because it's so early, it's important to stay humble around how little we know. I think in many ways, the simplest and yet most sophisticated assessment came from meme account Dr. Parikh Patel, who wrote, The reason Nvidia stock is down after beating earnings is because there is nobody left on earth to buy more. Now, one wrinkle on this and something that I think is worth keeping in mind.

14:36Yesterday, I tweeted, Wall Street softening on AI has nothing to do with AI and everything to do with us moving into a rate cutting cycle. And what I mean by that is that in the entire period since ChatGPT launched, we've been in either an interest rate hiking cycle or a hold rates higher for longer stasis. In fact, ChatGPT launched in the midst of the fastest rate hiking cycle in 40 years. As it did so, Wall Street latched on to the AI narrative, not only because of conviction that it really was going to change everything and represent actual productivity increases and enhancement to GDP. I think all of those beliefs are legit, but the intensity with which it clung to the AI narrative, I believe also had to do with a counterbalancing force to the gloominess and practical liquidity decreases that were associated with that hiking cycle.

15:21And indeed, for the next couple of years, AI enthusiasm was constantly at war with macro questions and instability to see what would be the biggest influence on Wall Street investor mindsets. And frankly, for a lot of that time, AI has won. Now, however, we're entering a different period. For months, the writing has been on the wall that we were finally coming to the actual rate-cutting cycle, And I don't think it's surprising then that AI enthusiasm has softened as investors get to pick back up that other narrative and all of the benefits that they associate with interest rate cuts. Now, like I said, in the same way that I don't think the enthusiasm for AI was just predicated on that, I think that it was perhaps just a little bit more intense, I don't think we're going to see some massive falling out of love with AI either.

16:02I just think you're going to have more diverse opinions, more people arguing that prices shouldn't be what they are, and more things competing for attention in a way that naturally decreases focus on the AI sector. And with the first rate cut coming up in September, we will be able to see if that theory is right pretty soon. For now, though, that is going to do it for today's AI Daily Brief. Until next time, peace.