Two years ago, you may have been hard-pressed to meet someone who had heard of Nvidia NASDAQ:NVDA. Yet fast forward to 2024 and Nvidia looks set to cement itself as the fourth biggest company in the world if things keep going the way they have been.
In the US Nvidia trails only Microsoft NASDAQ:MSFT and Apple NASDAQ:AAPL when it comes to market capitalization, edging ahead of tech giants Alphabet (Google) NASDAQ:GOOGL and Amazon NASDAQ:AMZN.
The firm was founded in 1993 and is based in Santa Clara, California. As a leader in the design and manufacturing of graphics processing units (GPUs), Nvidia’s products are widely used in gaming, professional visualization, and data centres.
In recent years, the company has very effectively extended its influence into AI and deep learning, with its GPUs becoming pivotal in training and running complex neural networks. Revenue streams are diverse, encompassing GPU sales for various applications, data centre solutions, gaming products, professional visualization, and automotive solutions, particularly for autonomous driving technology.
This multifaceted approach has positioned the business as a key player in tech sectors driving innovation and advancements in computing.
Between them, Microsoft, Meta, Google, and Amazon spent over $10 billion on Nvidia’s H100 chips in 2023. “This was a key driver of their tripling revenue last year and their share price has consequently skyrocketed over the past 18 months,” says Sam North, a market analyst with CFD broker eToro. “Since forming a bottom in the market back in October 2022, shares have risen nearly 600%. However, it hasn’t always been plain sailing. From November 2021 to the low we saw in October the following year, shares dropped by nearly 70%.”
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Why has Nvidia’s stock price done so well?
Nvidia’s recent success can be attributed to its strategic positioning within the burgeoning AI market, aligning with one of the most influential megatrends projected over the next two decades. With the total addressable market for AI-powered products and solutions expected to soar from $241 billion in 2023 to an estimated $738 billion by 2030, Nvidia’s focus on designing and supplying AI chips has proven exceptionally timely.
The last 15 months have witnessed a remarkable surge in demand for AI chips, reflected in Nvidia’s robust financial performance, reporting sales of $45 billion, a substantial increase from $26 billion in fiscal 2023. The International Energy Agency’s projection that data center energy consumption will double in the next three years further underscores the escalating need for the infrastructure required to build AI products at scale.
“It is also worth noting that Nvidia’s asset-light model has contributed to an impressive free cash flow of $17 billion over the last four quarters, surpassing its semiconductor rival Advanced Micro Devices, which reported a free cash flow of $1 billion,” said North at eToro. “Also, as of 2023, Nvidia holds approximately 80% of the global market share in GPU semiconductor chips…Right now, people are believing the hype and the numbers are backing it all up.”
Is it too late to join the Nvidia stock party?
With all this all in mind, many armchair investors out there will be asking themselves – is it too late to join the party? Part of the answer lies in market timing.
“If there’s a dip in the market, presenting an opportunity to enter at a lower price point, it could be an advantageous moment to buy in,” says eToro’s North. “The company’s commitment to research and development, coupled with its strong financial position and comparatively low valuation, at 33x forward earnings estimates, suggests that there might still be room for growth. As the AI market continues to expand, Nvidia’s leadership position and strategic investments make it a stock worth considering, especially if the market provides an entry point at a more favourable price.”
The dominance of Meta NASDAQ:META, Microsoft, and Nvidia, along with Apple, Alphabet, Amazon, and Tesla NASDAQ:TSLA, the so-called Magnificent Seven, is beginning to rattle nerves among some investors and analysts who fear that a speculative bubble is forming.
Are Nvidia shares starting to create a bubble scenario?
Several risks could unsettle investors and present a potential downside for the company’s earnings. The issue of double ordering persists amidst a rush to secure chips, although that risk is arguably lower than the previous quarter as supply and demand normalise.
“There is also the issue of geopolitical tensions and trade restrictions after the US banned the sale of certain chips to China,” observes Kyle Rodda, a senior market analyst with Capital.com. “Disappointing guidance regarding sales in China sent Nvidia’s share price lower after last quarter’s results. Investors will be looking for signs of progress in the production and sales of China-compliant chips.”
Rodda thinks that for now, the gains look unlimited as the stock has attracted so much attention it is at risk of creating a bubble. “Fundamentally, the company has high growth potential but it’s not uncommon to see heightened volatility with a stock that has achieved such a high profile,” he says. “Short sellers will be looking to take advantage of any pullbacks which could deepen the losses if the momentum turns.”
But Nigel Green, the CEO of wealth management firm deVere, says this is currently more indicative of “a fundamental shift”, primarily propelled by advancements in artificial intelligence.
“Labelling this surge as a bubble requires a nuanced understanding of the underlying factors driving these unprecedented gains,” says Green. “Rather than a speculative mania, the market’s response to the Magnificent Seven seems to be grounded in the transformative power of AI, which is reshaping entire industries, enhancing productivity, and paving the way for the creation of new ones. At the heart of this paradigm shift is the increasing integration of AI technologies across various sectors.”
Green thinks Nvidia’s remarkable stock performance can be attributed to the increasing demand for GPUs in AI and machine learning applications. “As industries across the board integrate AI into their operations, the need for powerful hardware accelerators becomes paramount,” he notes. “Nvidia’s strategic positioning in this space positions it as a key player driving the AI revolution. The surge in its stock value reflects not only current market trends but also anticipation of sustained demand for its products as AI adoption continues to grow.”
Furthermore, he says, the Magnificent Seven’s impact extends beyond their individual successes. “Collectively, they are shaping the broader market sentiment and influencing investment strategies. Investors are recognizing the pivotal role these companies play in the AI ecosystem, prompting a re-evaluation of traditional valuation metrics.”
