Nvidia is about to test the nerves of AI investors

• All eyes will be on Nvidia on Wednesday.
• The chip giant is set to report earnings at a time when investor interest in AI is in flux.
• Buyers of its chips have faced swings as investors fret that returns on spending are a long way off.

Can Jensen Huang put anxieties over the AI industry to rest? We're about to find out.

The Nvidia CEO who's worth $113 billion is set to deliver the blockbuster finale to the summer's Big Tech earnings season on Wednesday as his chip company prepares to report second-quarter results at a volatile moment for the AI sector.

Though Nvidia enjoyed a crowning moment in June when it briefly became the world's most valuable company, both it and its customers have been whiplashed since then as investors have become obsessed with the elephant in the room: will reality ever match the hype?

The Santa Clara-based firm has, of course, been one of the surest bets for investors seeking to cash in on the generative AI boom, with its share price up a staggering 168% this year and a valuation close to $3.2 trillion.

Demand for its chips, or GPUs, has remained strong as Big Tech firms strive to build increasingly powerful AI models that deliver transformational change. Nvidia's revenue in the last quarter was a record $26 billion.

That said, there are two good reasons investors have seemed agitated.

Hype vs reality

The first reason is simple. In recent weeks several Big Tech firms have said that investors fear spending on AI infrastructure — much of it with Nvidia — is unlikely to generate meaningful returns anytime soon.

Google raised the alarm first when it reported earnings in late July, as its CEO Sundar Pichai struggled to respond to investors' questions on a call about AI's impact on revenue.

Though Pichai said the "risk of underinvesting is dramatically higher than overinvesting," it was hard for investors to ignore the fact that capital expenditure — which almost doubled year-on-year to $13 billion last quarter — was surging.

The story was similar for Microsoft, which posted earnings days later. Despite reporting a 15% year-on-year revenue jump to $64.7 billion, CFO Amy Hood told analysts that returns from AI should be expected in "the next 15 years and beyond."

For those who favor AI's long-term prospects, the patience being asked of them will be worthwhile.

Wedbush analyst Dan Ives, who has called Huang the "godfather of AI," expects Wednesday's results to be "another drop-the-mic moment for tech" as Nvidia talks up demand through 2025.

Bubble territory

But it's not clear everyone feels that way, which brings us to the second reason investors are anxious: more and more of them have a gut feeling that the broader AI market is in bubble territory.

Earlier this month, The Financial Times reported that hedge fund Elliott Management told investors that Nvidia stock was "overhyped," and it was "skeptical" about the relentless Big Tech demand for GPUs.

A June report from Goldman Sachs also suggested the industry was in bubble territory. Jim Covello, the bank's head of global equity research, said that although "bursting today's AI bubble may not prove as problematic as the bursting of the dot-com bubble," given that big AI spenders are "better capitalized," it could be a problem if AI "ends up having fewer use cases and lower adoption than consensus currently expects."

That brings us back to Nvidia. If the company forecasts chip demand to be as hot as ever, expect short-term anxieties to fade away. It'll signal that its customers still have every intention of building AI that proves to be industry-shaking and profit-making.

Anything else, however, could mark the start of a much more difficult chapter in the AI story.