Nvidia: A surging stock and a valuation of $2 trillion

Read time: 6m 30s

What happened?

Nvidia, an AI chip company, is now valued at $2 trillion (£1.58tn). Shares in the firm rose more than 4% in the morning trade on Friday (23/02/24), before decreasing back down a bit.

The gains were as a result of their most recent earnings report, released by the company earlier in the week.

*Image courtesy of* *Proactive Investors*

More on the story

Nvidia’s CEO, Jensen Huang, stated to investors that the demand was “surging” around the world this week. The firm's turnover has more than doubled last year to over $60bn.

In its most recent earnings report, he also hailed a “tipping point” for faster computing generative AI.

The company now ranks fourth in terms of the world’s most valuable publicly traded company, behind Microsoft, Apple and Saudi Aramco.

The shares became worth $1tn less than a year ago. For context, it took over two decades for the Santa Clara, a California based company to hit a valuation of $1tn.

Nvidia: A Quick Glance

What? A company that makes GPUs for use in AI, gaming, autonomous vehicles and more.

Current Founder/s: Jensen Huang, Chris Malachowsky, Curtis Priem

Current CEO/President: Jensen Huang

Founded: April 1993

Current share price: $821.08 (at the time of writing).

Click here to read my previous write-up on about the UK entering a recession

What factors have led to this?

A rise in AI. Since the release of ChatGPT in November 2022, the world has seen a rapid demand for AI products, startups and practically anything to do with it. Ai products are powered by chips, and Nvidia makes chips that are essentially the building blocks for AI. A wide range of industries, from finance, to healthcare, to the automotive industry, want to increase the amount of AI related ‘things’ they have. Bob O’Donnell, a US-based technology analyst said, “It’s being used in automotive for design, it’s being used in telecommunications for planning networks, it’s being used in mainstream companies to figure out and get insights into data that they haven’t been able to get before.” AI is something that is changing countries, companies, and individuals lives by doing some things faster, and in some cases, better.

*Image courtesy of* *University of Central Florida*

You have probably noticed that there is only one factor-the factor. We’re living in a transformational era, and investors want to grab a piece of the AI pie. Nvidia plans to ship its new chip, the B100, at the higher end of its product line later in 2024. Should things go to plan, expectations around its growth trajectory are positive.

What implications could this story have?

For Nvidia: They're arguably the AI company to watch when assessing how the world is using, and reacting to the rapid AI advancements we’re witnessing. More specifically, the company’s financial performance and the wider demand for its shares are being used as signals for the overall interest in AI around the world. Expectations around the future growth of Nvidia remain positive.

The recent rally has boosted the performance of both the DOW Jones Index and the Standard & Poor’s 500 Index (S&P 500). The former is a stock market index of 30 prominent companies, listed on stock exchanges in the US. The latter is an index tracking the stock performance of the 500 leading publicly traded companies in the US. Their next earnings report may send their shares even higher.

Image courtesy of Reuters

If the stock continues to do well, then the company will continue to do well and shareholders and other investors will be very happy. Its chief will continue to become wealthier and wealthier too. In the past week alone, Jensen Huang has become the world’s 21st most richest man, surpassing Charles Koch. However, I believe it’s important to remind ourselves that not everything lasts forever...

For the AI industry: According to this Bloomberg article, Generative AI could become a $1.3 trillion industry by 2032. This is one of the fastest growing industries in the world, and it’s understandable as to why. Speed, its potential for cost-saving, less room for error, increased efficiency, more accurate data...these are just some of the reasons why people and companies want to incorporate AI into their lives and institutions.

*Image courtesy of the* *University of Manchester*

Since Nvidia is being used as a bellwether for how the overall AI industry is doing, it’ll continues to grow as it currently stands. I believe that AI will continue to be adapted even to products, services and industries previously thought incapable. That’s the power of a frenzy. However, with more AI related...’everything’, will mean a higher demand for more of the materials that power them, such as chips.

For investors: It means they will continue to pour their money into AI related products, services and startups. If they see something booming, they want to capitalise and take part in it. The current AI boom may even cause some investors to increase their initial stake within a company, in order to reap as much financial benefit in the future-if the company does well that is. By that time, the AI frenzy may very well be over, so it could be a risk to do so.

For the public: It means that the AI products and services we currently have will get better and better, very fast. We will continue to use AI in our every-day lives because it either saves us lots of time, money and resources. The more we do so, the more AI becomes a huge part of our lives.

Factors that could sour the company’s positive future outlook...

Regulation. With the rapid advancement of the technology, comes the need for some sort of guidelines and some do’s and don'ts for it. Europe leading the way, with its EU AI Act, the world’s first regulation on the technology. The US and UK will definitely use their framework as a guide for their own AI rules. Some people may say such regulations could decrease innovation. Whilst I do believe this-to an extent-, having some form of guidelines does have its benefits. For example, it can provide some direction as to how this technology can be /governed’ and so people and companies don’t abuse it.
An increasing amount of lawsuits. The rise of AI has both its perks and drawbacks. Some of the drawbacks include the fact that the technology is becoming better and better as time goes on. The rise in deepfakes, and musicians who want to be compensated for their involvement in AI generated songs will creep up. For the latter, AI products, like ChatGPT, are trained on a vast amount of data that already exist online. For example, Elon Musk sued Microsoft and Bright Data, an Israeli company, for scraping public data from X. Cases such as this will continue to occur, and regulation can play a role in introducing a shift in this growing trend.
A surge in misinformation? In 2024, around 49% of people around the world will be going to the polls to vote in some sort of national election. We’ve already had some national elections so far- Indonesia, Pakistan and Bangladesh are some countries who have held theirs already. However, many eyes will be on elections in countries such as India, potentially the UK and especially the US. In January 2024, the World Economic Forum identified AI-driven misinformation and disinformation “poses the biggest short-term threat to the global economy.” AI deepfakes are easier and faster to make than ever before, and they have the potential to influence elections.

Are we in an AI Bubble?

Many people think we’re in one, others do not. A bubble, in term economics, can be defined as, “a market phenomenon characterised by surges in asset prices to level significantly above the fundamental value of that asset.” The potential risk of one, is that a market can risk crashing just as fast as it has risen. According to this article by the Nasdaq, bubbles are hard to detect because there is disagreement over the fundamental value of the asset.

With the value of Nvidia reaching all-time highs, and driving stock markets along with it, many have wondered whether the stock market has entered a bubble phase in terms of the technology sector and AI.

Jamie Dimon, JPMorgan Chase’s CEO believes we’re not in one. He stated, “When we had the internet bubble the first time...that was hype. This is not hype. It’s real.”

On the other side, Torsten Slok, chief economist at Apollo said, “the current AI bubble...bigger than the 1990s tech bubble.”

This topic has people on both sides of the coin, and whichever side you’re on-both have very valid points to consider.

Closing thoughts...

To hop on the AI bandwagon or not...that is a question that doesn’t really apply now. AI is here-and it’s here to stay. For now, how well Nvidia does will continue to be used to gauge how the adoption of AI is doing on a global level.

With anything, we need to be careful with both the pros and cons that come with it, and the popularity of AI is one of them.

I think Nvidia will continue to do well, at least for the next several months. The potential introduction of regulations from the US and UK could dampen the positive expectations around AI.

That’s it for this week!

What are your thoughts on the story? Do you think Nvidia will continue to do well? Do you think we’re in an AI bubble? Why/why not? You can comment below, send me a message on any of my social media pages or email me: hello@parahinsights.com.

I look forward to hearing from you!

Until next time, remember to stay curious!

Further resources:

‘AI chip firm Nvidia valued at $2tn’- Article by the BBC

‘‘AI is driving a market bubble that’s unlikely to burst, veteran advisor says’- Article by CNBC

DISCLAIMER:

This blog is for informational purposes only. Parah Insights is not associated with the news sources in this blog, and sharing does not equal endorsement. Parah Insights does not provide financial, tax, legal or accounting advice – always consult your financial and legal advisors to determine what’s right for you and your business.