What’s News in Earnings: How AI Agents Are Boosting Nvidia–and Opening the Door to Challengers

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0:34Hey listeners, it's Friday, May 22nd. I'm Dan Gallagher for The Wall Street Journal, and this is What's News in Earnings, a look at some of the biggest themes standing out in this earnings season. Chip companies make up about a fifth of the market cap of the S &P 500, and the industry's dominance is only growing. A rise in what's known as artificial intelligence agents is fueling even more demand for those chips. NVIDIA is the largest player in AI chips by far, and its latest quarter showed blistering growth in sales and profits, and those results beat Wall Street's expectations. But other companies are now coming for a piece of NVIDIA's business.

1:07That includes the newly public Cerebris, whose hot IPOs set the stage for other AI debuts expected later this year. And it includes tech giants like Google and Amazon, who are now making their own AI chips and starting to consider how to sell those to other companies.

1:28Joining me to break down NVIDIA's results and what they mean for the AI industry is tech reporter Robbie Whelan. So Robbie, NVIDIA's numbers were predictably huge. CEO Jensen Wong said on the earnings call, the demand has gone, quote, parabolic. Agentic AI has arrived. AI can now do productive and valuable work. Tokens are now profitable, so model makers are in a race to produce more. In the AI era, compute capacity is revenue and profits. NVIDIA is the platform of this era. But NVIDIA's stock fell afterwards. Robbie, why is that so predictable, and what was the biggest surprise in the report?

2:07Yeah, we had another blowout quarter for NVIDIA, and you would think that when we see results like that, that the stock would really just go through the roof. But it's very hard to budge NVIDIA's stock. What we've noticed in the last couple quarters is that the beat, that is the margin by which NVIDIA's results beat analyst expectations, is almost taken for granted at this point. It takes a really big beat for NVIDIA's stock to really see any kind of significant movement. The other thing is that the market is really rapidly changing for AI chips. We're no longer just training the chat GPT type models that began the AI revolution a couple of years ago.

2:46We're in this new phase where we're trying to monetize everything. And what that means is the companies that are developing AI tools need AI to be affordable. What you're seeing is a ton of new entrants into the market of AI chips. That's not necessarily a problem for NVIDIA, but it does change the situation for them a little bit. For the financial guy that I am, I also look at like NVIDIA's huge profit margins that have gone up in this AI world. And there's this old saying that your margin is my opportunity. There's a lot of these competitors that are saying, oh, you know, I could get some of that and undersell NVIDIA.

3:20And that's also a risk for them, right? There seems to be a lot of concern among investors about can they maintain the margins that they've been maintaining, you know, like 70 plus percent gross profit margins. Yeah, I've been thinking about margins a lot too. You know, with training in this old era that we were in, where NVIDIA was the undisputed top dog and selling these really fancy GPUs, which were really kind of like the Ferraris of computing, they could charge whatever they wanted. There was almost no competition. But now that we're in this new world where training is less emphasized and there are suddenly dozens and dozens of competitors who can provide solutions that are sufficient or that are comparable to what NVIDIA has, I don't see how they can maintain their margins forever.

4:02I noticed on the call, they actually gave an interesting number. They said they have visibility to$20 billion in revenue for CPU chips, which are different from the GPU chips that NVIDIA is well known for. So they've been selling these CPUs now, and they say they're selling well. But clearly, this is one of the areas where all the competitors are really targeting against them. Yeah, I got a message from an investor who I know, and he said, Vera stole the show in that call. And what he's talking about is a type of chip called the Vera. It's a CPU. And to back up for a minute, a CPU stands for Central Processing Unit.

4:36It's the sort of most basic computer brain behind pretty much any computer in the world. But what NVIDIA has historically specialized in is not a CPU. It's something called a GPU, a graphics processing unit. And that's what allows people to operate these gigantic models that are sort of the bedrock of all the AI technology we use today. But there's this funny thing that's happened, which is that there's a new type of AI called agentic AI. And that means designing these tools called agents that can go schedule your dry cleaning pickup for you or be a sort of digital personal assistant for you or even write software code while you're out taking a yoga class or whatever.

5:14These AI agents, they require many more of these basic chips called the CPUs. NVIDIA does design some of these and sell them, but they're a lot cheaper than their complex GPUs. They're a lot less expensive. They produce a lot less revenue. That's yet another shift underway right now that's very dramatic and very important for the future of AI companies and for chip companies. One very recent development, SpaceX IPO filing is out, and we also have the news that OpenAI is racing to the same. And Anthropic is making this breakthrough about its profitability. So we've got these three big companies very closely tied to AI in this pipeline to go public.

5:55What does that tell us about NVIDIA and their prospects? Yeah. So what those three companies all have in common, besides the fact that they're all about to go public and raise a huge bundle of money, is that they'll buy chips from NVIDIA. So when we see this news about Anthropik racing to profitability a lot faster than anyone expected, OpenAI and SpaceX, all three of them really moving towards IPO, If those companies are going great guns, that's great news for NVIDIA. Robby, thanks for being here today. Thanks for having me on, Dan. And that was What's News and Earnings. Today's show was produced by Alexis Moore with supervising producer Tali Arbel.

6:31Additional sound courtesy of S &P Global Market Intelligence. Later today, we'll have the PM edition of What's News out for you as usual. I'm Dan Gallagher. Have a great day.

6:45Hey, this is Telus Demos. And I'm Miriam Gottfried. We're reporters at The Wall Street Journal and the hosts of WSJ's Take on the Week. It's a weekly show that gives listeners a leg up in the world of markets and investing. From the Fed's moves to market bubbles, we dive into the biggest deals, key players, and business news ahead. If you're looking for more news and tools that you can use to help navigate the markets, consider becoming a subscriber to The Wall Street Journal. Visit subscribe.wsj.com slash take on the week to subscribe now.