As Nvidia serves up a giant cookie, Wall Street asks for milk

A version of this story appeared in CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.

The world’s leading AI chip producer, Nvidia, just delivered a slam dunk earnings report that most businesses would be jealous of. Sales rose 122% in the second quarter. Profits doubled. The outlook for the current quarter? Strong.

In short: The numbers were fantastic.

Yet Nvidia’s shares (NVDA) slumped 7% after its earnings came out Wednesday night, and they stayed down Thursday. For a stock that’s up more than 150% for the year, that’s nothing to fret over.

But the dip says a lot more about Wall Street than it does about Nvidia.

Here’s the deal: Wall Street has been all aboard the AI hype train for the better part of the last 18 months. Wherever investors see potential AI profit, they’re throwing money at it.

Nvidia, once a relatively niche computer chip maker, has been the biggest beneficiary of that spending spree. Over the past five years, its stock is up some 3,000%. The company (pronounced en-VID-eeyah) has ridden the hype wave to become one of the most valuable brands on the planet, achieving a $3 trillion valuation that puts it among giants like Apple and Microsoft.

Given Nvidia’s centrality in the AI narrative, its quarterly earnings reports have taken on a Super Bowl-like quality of their own, spawning their own watch parties and memes and endless feverish commentary. Throughout the past year-plus, the company has managed to beat expectations by a country mile every time it reports, essentially training Wall Street to expect the unexpected.

But on Wednesday afternoon, when Nvidia’s earnings landed, a ho-humness settled in. Yes, Nvidia beat expectations. But — and we know how this sounds — it was expected to beat expectations. And did it really beat everyone’s expectations by as much as they expected?

It was as if all of Wall Street had bought tickets to the hottest show on Broadway only to show up and see all the leads were being played by understudies — a great show, a phenomenal parade of talent on stage, worthy of all the applause. But it just didn’t quite have the magic of the original cast.

That tinge of disappointment wasn’t the only thing weighing on Nvidia investors, though.

As the thrill of the initial AI buzz starts to fade, Wall Street is (finally) getting a little more clear-eyed about the actual value of the technology and, more importantly, how it’s going to actually generate revenue for the companies promoting it.

As my colleague Clare Duffy wrote earlier this month, Big Tech still has relatively little to show for all their billions spent on AI, and investors are starting to get antsy.

We’ve got ChatGPT and Google Gemini, which are impressive enough, but not exactly the game changers they’ve been touted to be. All anyone really wants from AI right now is to make mundane tasks a little less onerous, but tech companies keep pushing products that take the fun parts of humanity — writing fan letters with your kid, say, or making music or painting — and delegate them to a bot.

There is good news and some potential bad news for Nvidia investors.

There are some on Wall Street who suspect AI mania may be a bubble about to burst, but Nvidia itself isn’t some young startup peddling promises of an AI revolution.

If we think of the AI craze as a kind of gold rush, Nvidia is the company manufacturing axes and shovels. Its products were useful before AI became a frenzy — Nvidia chips were prized by gamers decades ago — and they will be useful long after AI becomes… whatever AI is going to become. (The next internet? The next dot-com bubble? The fourth horseman of the apocalypse? Choose your own adventure.)

As Nvidia CEO Jensen Huang noted during a call with analysts Wednesday, the company’s chips don’t just power AI chatbots but also ad-targeting systems, search engines, robotics and recommendation algorithms. Its data center business continues to drive nearly 90% of its total revenue.

The potential bad news: Nvidia makes hardware that is mindbogglingly complicated and hard to replicate, which is why even the biggest names in tech, including Google and Amazon, rely on it. But that may not always be the case. Those big customers could eventually become big rivals, as virtually all of them are are racing to build their own AI chips.