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"Nvidia's AI-Driven Stock Surge Boosts Earnings Multiple, Surpassing Tesla by Threefold"

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Nvidia's Remarkable Rise in the Tech Industry

In the aftermath of last year's tech stock market rout, 2023 has seen a rebound for all the significant players in the industry. However, one company has outperformed the rest: Nvidia. The company's shares have soared by 180% this year, surpassing every other member of the S&P 500. This impressive growth is attributed to Nvidia's decade-long lead in the production of artificial intelligence (AI) chips and software, highly sought-after commodities in Silicon Valley.

Nvidia's Value and Impact on the Tech Industry

Nvidia's current valuation exceeds $1 trillion, ranking it as the fifth most valuable U.S. company. It trails behind only the tech giants Amazon, Apple, Microsoft, and Alphabet. Despite not being as well-known as its mega-cap tech counterparts, Nvidia's core technology underpins the rapidly emerging product, ChatGPT, that's poised to disrupt sectors ranging from education and media to finance and customer service.

ChatGPT and Nvidia's Role

ChatGPT, OpenAI's popular chatbot, along with AI models from several well-funded startups, all rely on Nvidia's graphics processing units (GPUs) to function. These GPUs are widely recognized as the best chips for training AI models, and Nvidia's financial forecasts indicate a relentless demand. The company's powerful H100 chips, priced at around $40,000, are being purchased by Microsoft and OpenAI in the thousands.

Investor Expectations and Nvidia's Growth

Despite the company's momentum and seemingly unquenchable demand, Nvidia's stock price carries a multitude of growth assumptions. These include the expectation of sales doubling in the upcoming quarters and net income nearly quadrupling this fiscal year. Some investors view the stock as priced for perfection, with Nvidia's price-to-earnings ratio at a staggering 220 over the last 12 months. This is considerably high, even when compared to other high-valued tech companies like Amazon and Tesla.

Analysts' Projections and Nvidia's Future

If Nvidia meets analysts' projections, its current price, although high compared to most of the tech industry, appears more reasonable. Its P/E ratio for the next 12 months of earnings is 42, compared to Amazon's 51 and Tesla's 58. As Nvidia prepares to report earnings later this month, analysts anticipate a quarterly revenue of $11.08 billion, marking a 65% increase from the previous year.

Nvidia's Stock Rally and Potential Risks

Nvidia's stock rally this year is impressive, but the chart showing the company's 10-year run is even more astonishing. A decade ago, Nvidia was valued at approximately $8.4 billion, a fraction of chip giant Intel's market cap. Since then, Nvidia's value has skyrocketed by over 11,170%, making it seven times more valuable than its rival. Nvidia's founder and CEO, Jensen Huang, has seen his net worth increase to $38 billion, ranking him 33rd on the Bloomberg Billionaires index.

Nvidia's Shift from Gaming to AI

Before the rise of AI, Nvidia was known for producing essential technology for video games. The company, founded in a Denny's in San Jose, California, in 1993, built processors that enabled gamers to render sophisticated graphics in computer games. Video games remain a significant business for the company, but what truly excites Wall Street is the emerging AI business under Nvidia's data center line item.

Nvidia's AI Market Dominance and Future Prospects

Nvidia's pivot to AI chips has been 15 years in the making. In 2007, the company released a software package and programming language called CUDA, which allows programmers to utilize all of a GPU chip's hardware features. Developers quickly discovered that the software was effective at training and running AI models, and CUDA is now an integral part of the training process.

As Nvidia's valuation has grown, the company has taken steps to secure its lead and meet high expectations. Nvidia has also become a significant startup investor in the venture world, focusing on companies that work with AI models. Nvidia's investments could provide a pipeline of growing customers, boosting Nvidia's sales and providing a more diverse client base for its GPUs.

The Future of Nvidia's GPU Architecture Cycle

Nvidia is now approaching the midpoint of its current GPU architecture cycle. The latest high-end AI chip, the H100, is based on Nvidia's Hopper architecture, with its successor expected in 2024. Cloud providers, including Google, Microsoft, and Amazon, have announced plans to heavily invest in expanding their data centers, which will primarily rely on Nvidia GPUs.

Investors are buying into Nvidia's story, but as recent volatile trading has shown, they are also quick to sell if the company or market hits a snag. Despite the challenges, Nvidia's impact on the tech industry remains undeniable, and its future prospects continue to attract attention.

Implications for New Businesses

Nvidia's dominance in the AI chip market and its remarkable growth trajectory provide a compelling narrative for new businesses. The company's success story offers valuable insights into the importance of innovation, strategic positioning, and the ability to pivot and adapt to market demands.

Lessons from Nvidia's Success

New businesses, particularly those in the tech sector, can learn from Nvidia's strategic shift from gaming to AI. This move not only diversified their portfolio but also positioned them at the forefront of a rapidly growing industry. For startups, this underscores the importance of staying ahead of technological trends and being prepared to pivot when opportunities arise.

The Future of AI and New Businesses

As AI continues to disrupt various sectors, businesses that can leverage this technology will likely gain a competitive edge. Nvidia's role in this landscape, particularly its contribution to the development of AI models and software, suggests a promising future for companies that can effectively utilize AI. However, Nvidia's high valuation also serves as a reminder of the risks associated with high growth expectations and the importance of sustainable business practices.

In conclusion, Nvidia's success story offers both inspiration and caution for new businesses. While the company's rise underscores the potential of AI, it also highlights the need for strategic planning, adaptability, and a balanced approach to growth.

Article First Published at: https://www.cnbc.com/2023/08/11/nvidia-ai-driven-rally-pushed-earnings-multiple-higher-than-tesla.html

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