Why is Nvidia stock going up?

Dubbed by Forbes as the hottest stock of 2023, tech giant Nvidia saw its stock price soar by more than 200 per cent last year. The American GPU manufacturer, which is now branching out into AI technology, traded at around $40 per share on the NASDAQ in 2019 – today Nvidia is trading at almost $960 per share. The company is now worth $1.8 trillion, and its revenues continue to beat broker forecasts. According to the Wall Street Journal, the analyst consensus is that investors should continue to buy the stock, which they say could continue to climb in value. The success story is leading some observers to ask, what is driving Nvidia growth, and is it sustainable? 

Nvidia Share Price Chart

Nvidia leading the charge on AI

Nvidia made its name in the 1990s as a manufacturer of GPUs, or graphics processing units. Taiwanese-American founder, Jensen Huang, who remains Nvidia’s CEO today, helped create a formidable reputation for the firm as an industry leader within a few years of its creation. Nvidia’s GPUs found fertile ground in the video game market, where increasingly advanced hardware was required to run games with high visual fidelity on the PC. 

While Nvidia continues to dominate the GPU market, with sales of processers contributing billions to the firm’s revenue each year, its meteoric rise has been largely attributed to its strength in the artificial intelligence sector. Mr Huang has even been dubbed “the godfather of AI” for his pioneering work in the sector. While other tech firms such as Meta struggled in 2022, Nvidia bucked the trend to grow through what was a difficult year for the NASDAQ. It is a feat that Michael Que of Investor Place attributes to its commanding lead in AI. Writing for the stock news website, Que said Nvidia was well-placed to capture the market: 

“In the world of AI, many argue that Nivida is the best fit to capitalize on the market; it’s said to own almost 90% of the AI chip market. Nvidia had a first-mover advantage because its original market, gaming, used parallel processors — perfect for AI applications. Other than speed itself, it also beats competitors in its network power and software. Nvidia acquired Mellanox, which helps it link thousands of GPUs in a data centre together to boost performance. In terms of software, its investment in this area is a key factor as to why it beats AMD in performance, even though its chips aren’t that much more powerful.”

Nvidia is also making major investments in other AI companies, further helping to consolidate its hold on the sector. Most recently Nvidia purchased $250 million worth of Arm Holdings, whose proprietary technology is being used in Nvidia’s latest AI ‘superchip.’ Nvidia also recently purchased shares in Nano-X Imaging, which is said to be utilising the power of AI to diagnose patients in the medical field, as well as in Recursion Pharmaceuticals, Soundhound AI and TuSimple Holdings – with each company having in common the pursuit of innovative AI technologies. 

It came after Nvidia invested in 35 AI companies last year, making it one of the most active investors in the sector, according to the Financial Times. Reportedly all of the firms which received investment from Nvidia were users of the firm’s hardware and software. According to filing disclosures, the acquisitions have brought Nvidia’s holdings in other firms close to $1 billion, a reported tenfold increase in its 2022 holdings.  

Nvidia shares have soared 40 per cent in just the first few months of 2024, with Reuters reporting Nvidia’s ‘stunning performance’ had made it a standout performer amongst the so-called Magnificent Seven, which includes Amazon and Apple – whose growth is trailing behind Nvidia’s. Earlier this year Nvidia beat the two firms to briefly become the third biggest company in the US by market value before being beaten back into fifth place.

GPU prices boosted by demand surge

As well as being at the tip of the spear when it comes to AI, Nvidia has continued to do well selling its GPUs and has benefitted from high prices as surging demand put pressure on supplies of the hardware. Nvidia’s dominance in the GPU market, where it has outperformed its main rival AMD, has also relieved pressure on competition which would ordinarily drive down prices. In 2019, Nvidia launched its RTX 2080 Ti GPU at a retail price of $1,299 and would later launch for RTX 3090 Ti in 2022 at a price point of $2,000. An analysis by tech news site Hexus showed that Nvidia chips were priced more competitively in years when they faced strong challenges from rival firms, and more expensive when they had a clear field.

The high price points have also been made possible by a global supply-side shortage of semiconductor chips. The crisis was particularly acute from 2020 to 2022 when manufacturers went into lockdown in response to the Covid pandemic. The lockdowns also coincided with increased demand for the chips, as consumers sought to purchase gadgets to keep themselves entertained in isolation. At the same time, the automotive industry began to move toward EVs in a big way, which require semiconductors to operate their self-driving and in-car entertainment systems. Because of the complexity of chip manufacturing, there was no quick way to boost output to meet demands. While the shortage is now “largely resolved”, according to SpGlobal, demand still outstrips the supply of some chip types, and uncertainty around supply continues to persist.

According to a 2023 report in The Guardian, Nvidia was thought to have benefitted from a glut of chip orders from China, ahead of expected embargos issued by the US as part of an ongoing trade row. While some of those pressures may have let up – Nvidia CEO Jensen Huang has said consumers should expect high prices to continue. 

Is Nvidia stock a bubble?  

While some analysts have expressed optimism about Nvidia’s future, others have characterised its recent success as a bubble and have compared the AI gold rush to the dot-com boom. Analysts from D.A Davidson reportedly compared the position of Nvidia to that of IT company Cisco in the early days of the internet. Cisco enjoyed great success before the dot-com bubble burst resulting in its shares collapsing by 80 per cent. In comments made to Quartz, the chief economist at Apollo Global Management said the top 10 companies in the S&P 500 were overvalued to a greater extent than the dot-com bubble firms of the 1990s. 

Analysis by the Motley Fool points toward coming headwinds which could dampen cause for optimism in Nvidia’s price, including regulatory challenges and the prospect of increased competition, reporting that: 

“[T]he company’s four largest customers by revenue (in no particular order) — Microsoft, Meta Platforms, Amazon, and Alphabet — make up roughly 40% of Nvidia’s sales on a combined basis. All four of these juggernauts are developing AI chips of their own, which could lessen or remove their respective reliance on Nvidia’s A100 and H100 GPUs.”

“U.S. regulators are doing Nvidia no favours, either. They’ve put their foot down on a couple of occasions and restricted exports of high-compute AI chips to China. Not being able to ship its top-of-the-line AI GPUs to the world’s No. 2 economy may cost Nvidia billions in lost revenue each quarter.”

However, it’s a view rejected by JP Morgan CEO, Jamie Dimon, who said “When we had the internet bubble the first time around… that was hype. This is not hype. It’s real. People are deploying [AI] at different speeds, but it will handle a tremendous amount of stuff.” That sentiment was backed by Nvidia’s recent earnings report, according to Bloomberg, which showed “artificial intelligence mania is still going strong.”

Analysis in financial news outlet The Street hit out at the comparison to dot-com casualty Cisco, saying there was no equivalency with Nvidia. The outlet recently reported that:  

“When comparing Nvidia’s valuation to Cisco’s during the dot-com bubble, it’s important to consider the NTM P/E ratio (price/earnings for the next 12 months). While Cisco’s NTM P/E reached over 158x in the 2000s, Nvidia’s is at 34.9x now…”

“Nvidia’s leadership in the GPU market for data centres puts it at the forefront of artificial intelligence evolution. With all of the buzz surrounding the new technology (which seems well-founded, as several big tech companies are already developing services and demanding Nvidia’s products), Nvidia benefits.”

“This position seems different from Cisco’s — or those of other historical bubble stocks. Even though Cisco was “the” stock at that time, the company, which sells switches and routers, had much higher expectations than Nvidia. To justify an NTM P/E above 150x, the company needed to demonstrate explosive growth — which it couldn’t.”

However, The Street did raise concerns over what it claimed was a lack of margin safety in Nvidia stock, which it said left little room for error – putting pressure on the company to continue to beat analyst expectations to maintain its leading position in the market and its high stock price.

Nvidia, the right company at the right time?

Nvidia’s remarkable growth has been attributed to its strategic positioning in both the GPU market and the AI sector. Leveraging its strong foundation in GPU manufacturing, Nvidia has expanded to become a pioneer of AI technology, earning its founder the moniker of “the godfather of AI” for his innovation in the sector. With a commanding lead in the AI chip market, bolstered by strategic acquisitions and investments in AI companies, Nvidia has demonstrated a commitment to development and expansion.

Moreover, Nvidia’s success in selling GPUs, coupled with high prices driven by surging demand and supply chain dynamics, has further propelled its growth trajectory. Despite concerns about valuation and potential challenges such as regulatory hurdles and increased competition, Nvidia’s leadership in the GPU market and its strategic investments in AI technologies position it as a leading player in the industry. While some analysts question the sustainability of Nvidia’s growth and draw parallels to historical bubbles, others argue that the company’s fundamentals and market positioning set it apart. Ultimately, Nvidia’s ability to continue innovating, adapting to market dynamics, and delivering on investor expectations will determine the longevity of its growth trajectory.

Please note, the above is for educational purposes only and does not constitute advice. You should always contact your advisor for a personal consultation. 

* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.