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NVIDIA joins $1 trillion club via generative AI

The approach of summer solstice in the Northern Hemisphere has been accompanied by a proverbial storm in the format of a brand new entrant in the elite club of companies valued at more than $1 trillion.

Nvidia, a 30-year old company that manufactures semi-conductors used in thousands of products, including computers, appliances, gaming hardware and smartphones, became only the sixth publicly traded company to currently possess a market capitalisation of more than $1 trillion. The other five are Apple, Microsoft, Saudi Aramco, Alphabet and Amazon. Tesla and Meta enjoyed brief spells in this very exclusive group, but their valuations have since dropped quite substantially to levels of around $600 billion.

Artificial intelligence (AI) lies behind the recent success of Nvidia, with this term being mentioned more than 40 times in the company’s latest earnings report. After starting out by creating graphics process units (GPUs) for video games, Nvidia explored the application of these units to allow computers to learn without programmers.

This experiment turned out to be a key factor for developing generative AI, also referred to as “deep learning”. One of the main reasons for the recent surge in Nvidia’s share price was the announcement in the earnings report of a new generation of GPUs that work at twice the speed of those previously available, which has cemented the company’s standing as a world leader in AI.

After briefly hitting a two-year low in October last year, the company’s market value has gained $650 billion, with a trebling of the share price during 2023. Despite the share price having become extremely expensive, the party may continue for some time to come. A survey of Wall Street stock analysts by FactSet has revealed signs of an investor craze for AI, with buy ratings of more than 80% for Nvidia and also other tech stocks such as Broadcom.

ChatGPT smashes record for apps

The technology behind AI has proven to be a hit amongst consumers, with OpenAI’s ChatGPT having secured more than 100 million users within two months of its launch in November last year. Despite many qualitative challenges that still need to be addressed, ChatGPT now holds the record for the fastest growing consumer application ever.

There is little doubt that the gold rush for AI stocks had its origin in the astounding performance of ChatGPT. Elon Musk was one of the co-founders of OpenAI, which teamed up with tech giant Microsoft in 2019. Microsoft initially provided funding of $1 billion to support OpenAI's efforts in exchange for an exclusive license to the AI firm's technology.

This strategic investment has recently been raised to $10 billion and it is inevitable that AI applications will spawn a competitive industry. Google's AI firm, DeepMind, is expected to release its own version of an AI chatbot this year (Chinchilla AI), which could directly rival ChatGPT. Other technology companies are also spending large amounts to develop their own AI programmes and applications that have included Alphabet’s Google Translate and camera facial focus.

Nvidia’s surge picked up steam at the end of May after it unveiled a mouth-watering revenue target of $11 billion, almost 60% higher than the consensus forecast amongst Wall Street analysts. The extraordinary rise in turnover and market capitalisation of the company has played a key role in sparking a rally in the whole of the semi-conductor industry, with the Nasdaq sector index for this group of 30 companies having advanced almost 40% in 2023.

Despite the company’s shares have become very expensive (a current price-earnings ratio of more than 200), enthusiasm for AI stocks continues to grow, with several companies trading at a higher multiple of forward earnings than the average of 18.2 for the S&P 500 (as at the first week of June).

As inflation in the US continues to decline, the chances of a pause or even an end to the interest rate hike cycle in the US are improving. This may lead to a welcome return of a risk-on sentiment amongst fund managers, which could extend the bull-run for AI shares well into the future.

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