Nvidia created an AI bubble, and software stocks are already paying the price

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Nvidia Corp. increased the fervor for artificial intelligence on Wall Street, but plunging software stocks showed Thursday why betting that the chip maker’s AI revenue will quickly ripple through the rest of the tech sector is a losing proposition.

After Nvidia’s prediction of record revenue — in part fueled from AI — led to strong gains for other companies also betting on the technology last week, several strong earnings reports from software companies still led to big declines in after-hours trading Wednesday. Hot AI bet C3.ai Inc. fell 14% following soft revenue guidance; cybersecurity company CrowdStrike Holdings Inc. saw shares fall nearly 12%; Salesforce Inc. shares lost nearly 6%; and Okta Inc.’s stock dropped 16%.

Those companies largely beat expectations both for results and guidance with their reports, but did not provide anywhere near the level of Nvidia’s audacious forecast. Investors likely had outsize expectations heading into the results after bidding up software stocks in the past month — the iShares Expanded Tech Software Sector ETF enjoyed its best month since 2020, gaining 10.6% in May.

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Initial comments from one analyst regarding C3.ai’s results summed up Wall Street’s view at the moment, and explained the big letdown among investors.

“Despite AI optimism, we are hearing from our experts that generative AI is unlikely to represent a significant revenue-generating opportunity for the company and more likely represents a means for augmenting the user experience and searchability of the current platform,” Jordan Berger, an analyst at Third Bridge, wrote in a brief note to clients. “The company reported progress towards deploying generative AI technology within its platform, but how this will translate to revenue upside remains to be seen.”

In the meantime, the economy is still not solid, and corporate customers are largely looking to cut spending after jumping into cloud software during the first two years of the COVID-19 pandemic. Okta CEO Todd McKinnon admitted as much, telling MarketWatch that he was concerned about worsening macroeconomic conditions.

This was exactly the set-up that led this column to question last week whether excitement for generative AI that was boosted by Nvidia’s report would create a stock bubble for tech. While Nvidia and perhaps some other chip makers and large cloud-computing companies could see near-term results from generative AI, any revenue boosts for other companies is likely far in the future and speculative at this time.

Executives at the companies reporting Wednesday did not dispute that the AI opportunity will take some time to show results. Salesforce, the maker of cloud-based sales management tools, has been offering AI predictive capabilities with its Einstein technology for years and has integrated with Open AI’s ChatGPT for what it now calls Einstein GPT. Slack GPT is also coming soon.

But when asked at the top of the company’s call with analysts Wednesday about the opportunity for Salesforce to recognize bigger revenue from AI, co-founder and Chief Executive Marc Benioff was vague.

“I think this is the absolute question of the day, which is, we are about to enter an unbelievable super cycle for tech and everyone can see that,” he said. “This is an incredible opportunity for not only Salesforce but our entire industry.”

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CrowdStrike executives were just as vague when it came to talking about quantifying a revenue boost from AI. When CEO and co-founder George Kurtz was asked by an analyst how it would monetize its new AI services, he said, “It is something that is really foundationally built into the platform.”

He added that as AI “evolves over time,” CrowdStrike will see if it can monetize it as specific skills, “but I think, first and foremost, let’s get into the customer base,” he said.

These types of responses will likely be common for months or even years — software companies and others looking to leverage AI will have to spend on the technology and iterate on their offerings before they see big returns, if that ever happens. In the meantime, investors looking to jump into tech stocks that aren’t selling the picks and shovels needed for AI development and hoping for near-term returns will likely be disappointed.

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