Nvidia Soars on Wall Street's AI Battleground, Despite Mixed Quarterly Results

Nvidia has emerged as a winner on Wall Street's AI battleground, with its stock price soaring by 42% since the start of the year, the best performance on the PHLX Semiconductor Index. While analysts were estimating a 21% year-over-year slide in Nvidia's revenue for the January-ended quarter, the hype over the popularity of AI chat tool ChatGPT and the AI war brewing between Google and Microsoft overwhelmed concerns about the chipmaker's business in the short term. In fact, the rollout of AI chatbot-based search is expected to result in even more capital spending being directed towards Nvidia's way.

Despite the mixed quarterly results, Jefferies analyst Mark Lipacis boosted his price target on Nvidia's stock by 22% after Microsoft and Google made major announcements regarding the adoption of AI chatbot tools in their respective search engines. Nvidia is already a major supplier to those companies and other tech giants offering cloud computing services. Web searches using AI tools such as ChatGPT require far more intense computing power than standard search activity.

While revenue indeed fell 21% year over year, the company's video gaming segment showed a surprising upturn from the previous quarter's crash, beating analysts' revenue forecasts by 15%. Nvidia's CFO Colette Kress said some of its cloud customers "paused at the end of the year to recalibrate their build plans," but data-center sales growth is expected to accelerate past the current quarter. The optimism over AI isn't misplaced, as the shift to AI-based search will require the necessary investments to equip their networks, even if they moderate their capital spending elsewhere.

Nvidia's announcement of a new cloud-based software business also gives investors confidence. The move allows Nvidia to expand its AI customer base beyond the deep-pocketed tech giants that buy its chips, which Cowen analyst Matt Ramsay wrote helps underpin Nvidia's "transformation from a GPU hardware company to an accelerated computing (hardware/software) platform provider." 

At a valuation of more than 50 times forward earnings, Nvidia needs to be about more than just chips, and this latest move should help the company sustain its impressive rally on Wall Street.

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