Some of the biggest winners of the 1849 California Gold Rush were the stores that sold picks and shovels to the prospectors who had high hopes of a big payday. It seems history is repeating itself.

NVIDIA isn’t selling picks and shovels, but it is selling some expensive tools to companies that have dreams of striking gold in the artificial intelligence gold rush of 2024.

From an earnings perspective, all eyes have been on the computer chip maker NVIDIA, which announced its earnings and projections after the market closed on Aug. 28. As the senior member of the so-called “Magnificent Seven,” its projections are a potential forecast for investors on how the tech sector will go in the next few months. The hope has been high that NVIDIA’s results will come in strong and give a fresh boost to chip stocks and the entire tech sector.

A deeper dive into the Magnificent Seven reveals that it is actually one seller (NVIDIA) and six buyers (Google, Amazon, Apple, Meta, Microsoft and Tesla) who are NVIDIA customers. NVIDIA, the seller, announced its quarterly revenue (122% year-over-year) and adjusted earnings (154% year-over-year) have more than doubled from this time last year.

Why is the AI chip business so good? The big tech companies are spending money to build up their AI capabilities and services at a record rate, and much of that is going to NVIDIA. The reason is that NVIDIA has better computer chips, systems and software for processing AI than anyone else by a large margin. So clearly, its sales to the rest of the magnificent companies are going well. But how are NVIDIA’s customers doing?

It looks like NVIDIA is again the big winner as the rest of the tech sector races to add expensive AI to their business so as not to be left behind. After the six stocks in the Magnificent Seven, other than NVIDIA, posted their earnings, investors became concerned about overspending on AI. They are concerned it will be a long wait for them to see AI start producing revenue and justify the heavy expense.

NVIDIA’s four biggest customers, Microsoft, Google, Meta and Amazon, spent more than $58 billion in the past quarter on AI, 64% more than they spent during the same period in 2023.

Investors weren’t impressed.

• Alphabet (Google) shares have fallen almost 5% since its earnings call because of higher-than-expected AI infrastructure costs, even though the company reported better-than-expected sales.
• Amazon shares are down more than 6% since announcing its quarterly earnings because they announced its future profits would be lower in the next few quarters as it ramps up AI spending.
• Microsoft shares have been down 4% since its earnings call after it announced a decline in cloud revenue and heavy spending on AI investments.
• Meta’s (Facebook and friends) earnings were the exception, and its shares responded positively. Its shares have been up almost 9% since its earnings call after it laid out a more straightforward approach to justifying the high AI costs and how it is expected to profit from them.

I am taking a balanced approach to AI as this plays out. We will see how long investors will tolerate AI spending going up and revenue going in the opposite direction. I am overweight in the digital media-heavy communication services sector, have a neutral stance on technology and my portfolios are currently underweight in the consumer discretionary sector.

NVIDIA is making huge profits selling AI chips, the modern-day equivalent of picks and shovels, to several companies that have yet to profit from AI but have high hopes of a big payday. Only time will tell if the eventual AI payday will have been worth the huge amount spent on the prospects of hitting AI gold.

Have a blessed week.

Fervent Wealth Management is a financial management and services entity in Springfield, Mo. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

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