Move over Tesla. There is a new king of Wall Street: Nvidia (NVDA). This week, the Santa Clara-based chipmaker stunned the market again with its fabulous revenue growth. In the last quarter, NVDA’s revenue rose to $22 billion, up 265 percent year-on-year.
This quarter, sales are expected to rise again to $24 billion. Quarterly earnings per share jumped 765 percent from a year ago. These results surpassed even the most bullish estimates. No wonder the whole market cheered, to the point of awarding the company coveted a $2 trillion valuation.
Nvidia’s one-day market cap gain of $276 billion is the largest ever recorded.
NVIDIA, the new King of the Meme stocks
Just like Tesla, who spearheaded the electric-vehicle transition in the last decade, Nvidia now captures the revolutionary artificial intelligence boom perfectly.
Nvidia is the right company at the right time.
But to be fair, Nvidia was not this hot just 18 months ago. Then, Nvidia’s total annual revenue (for 2022) was only $27 billion. Now NVDA earns this in a quarter. Nvidia’s fantastic growth has sharply raised the valuation for 30-year old chipmaker.
What sparked the dramatic change in Nvidia’s revenue trend? Generative AI. Ever since ChatGPT burst into the tech scene, the word Artificial Intelligence has become the hottest theme across the world.
Users and observers were deeply stunned by what ChatGPT and DALL-E — and now SORA – could achieve. Broadly speaking, these generative AI tools, in stark contrast to the earlier versions of AI, could spill out texts, answer tons of user questions fairly accurately, questions that range from encyclopaedic knowledge to prose writing, and generate text-based artworks. These programs are trained by a huge quantity of data using Large Language Models (LLM).
With this prodigious – but low-cost – writing capacity at hand, generative AI simply erodes the knowledge barriers, increases the productivity of companies and encroaches upon many traditional industries like programming, video and gaming, amongst others. But what has all this got to do with Nvidia?
The key connection is this. All Big Techs like Apple (APPL), Meta (META), Google (GOOG) and Microsoft (MSFT) are stampeding into generative AI to maintain their technological leads in their respective industries. To this end, it must train its data. And to do this training requires a gargantuan amount of computing power. Ergo, the demand for computing power is soaring through the roof.
Most importantly, underpinning these AI calculations engines are Nvidia’s market-leading chips, such as H100. Mind you, each of these H100 AI-dedicated machine costs around $20,000-30,000. And Meta alone is reportedly eyeing to buy 350,000 of these.
When investors project explosive demand like this, suddenly Nvidia becomes a ‘must have’ growth stock. Its chips are becoming widely entrenched in the booming AI industry and there are few credible alternatives for these highly cash-rich tech firms.
Since its 2022 lows, Nvidia has rocketed 600-700 percent. Its vertiginous rise is powering the S&P 500 to new all-time highs.
Is it now too late to buy Nvidia?
In a previous post, I wrote about the 2021 GameStop saga and what we can learn from it. Many rightly wonder: Is NVDA the new GameStop?
The most common underlying trait in both cases is that their share prices are driven by some serious manic buying. FOMO, you say.
That is true. But their FOMOs are driven by different factors. In GME’s case, short sellers couldn’t find enough shares to cover and everyone knew that. For Nvidia, there is an investment case for it. Its story is backed by hard financial numbers and revolutionary AI programs. So it’s altogether a different proposition. Driving a stock to $25 billion capitalisation (GameStop’s peak value) and one to a mammoth $2 trillion (Nvidia’s current value) requires a different set of players and capital. The latter has become a favourite of institutional investors to pivot into AI.
Still, having risen so much in such a short space of time, the risk of the AI sector overheating is obvious. At $2 trillion in capitalisation, Nividia is now the fourth-largest company in the world. There is only so much a stock can grow.
Moreover, most of the good news is probably baked in the current share price. Yes, Nvidia’s revenue and profits are growing fast; but its share prices are rising even faster. A potential disconnect between the fundamentals and share prices is possible.
Lastly, there may be a case to invest other chip stocks using ETFs like the iShares Semiconductor (SOXX, factsheet), which is based on the Philadelphia Semiconductor Index (see below). This ETF contains 30 chip stocks including NVDA. It also holds the bullish AMD (AMD) and Broadcom (AVGO). For your information, the latter is rising parabolically too.
In all, AI is a fast-growing industry and may warrant some exposure. Given how much the sector has rallied using trailing stops in any long positions is recommended.
Jackson is a core part of the editorial team at GoodMoneyGuide.com.
With over 15 years industry experience as a financial analyst, he brings a wealth of knowledge and expertise to our content and readers.
Previously Jackson was the director of Stockcube Research as Head of Investors Intelligence. This pivotal role involved providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Jackson brings a huge amount of expertise in areas as diverse as global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University and has authored nearly 200 articles for GoodMoneyGuide.com.
You can contact Jackson at jackson@goodmoneyguide.com
