Nvidia’s success: 12 crucial facts

The rise of Nvidia from relative obscurity to the world’s largest company has been hugely impressive. The event shines a strong light on the potential for artificial intelligence (AI) to change the world and the pivotal role Nvidia is playing in that.

Even so, we’ve now reached the point where questions are being raised about the sustainability of Nvidia’s success. That’s led to new volatility in the company’s shares.

To help understand Nvidia, here are 12 crucial facts together with a sample of bold views from fund managers.

1. Nvidia shares have risen about one and a half times this year even after rocketing in 2023. This meteoric rise briefly turned Nvidia into the world’s number-one listed company in mid June¹.
2. Nvidia is currently worth around $3 trillion, on a par with the market values of the world’s other two largest public companies – Microsoft and Apple. Its value is also about a third larger than the UK’s economic output in 2023².
3. Recent volatility in Nvidia’s shares reflects growing concerns we have travelled too far, too soon. Nvidia’s pullback hasn’t been driven by disappointing news events, suggesting some earlier gains were down to sentiment and momentum.
4. Nvidia was formed in 1993 with the mission of bringing 3D graphics to the computer gaming and multimedia industries. The company invented a specialised computer chip – the graphics processing unit, or “GPU” in 1999. AI soon became a must-have feature in games, owing to the demand for increasingly realistic interactive gaming scenarios.
5. Future applications include the 3D Internet, or “metaverse”, championed by Meta (formerly Facebook). NVIDIA Omniverse will be the tool used to build and operate metaverse applications.
6. All the possible applications of Nvidia’s AI-enabling chips are too numerous to consider all in one place. However, Nvidia’s strategy is to put its technologies at the heart of everything that uses AI.
7. Nvidia’s position at the leading edge of AI has created a familiar conundrum: how to place a value on the earnings capacity of a new technology? As it stands, Nvidia’s shares are considerably more expensive than the US stock market - on a price-to-earnings ratio of 73.3 compared to 28.5 for the S&P 500 - suggesting premium growth is already priced in.
8. Nvidia has demonstrated that it’s much more than a hold-and-hope stock. According to estimates collated by Bloomberg, the company is expected to generate profits of about $14.7 billion on sales of $28.4 billion this quarter³. This equates to a gross profit margin of almost 50%. That’s in sharp contrast to shares that soared just before the dotcom crash in 2000 on little more than the hope of actual earnings.
9. Nvidia’s customers have deep pockets. Microsoft has pledged to spend even more on computing hardware over the coming quarters, a significant proportion of which is bound to be focused on AI. Nintendo’s next-generation Switch console will reportedly include a customised Nvidia chip. The self-driving feature on Tesla vehicles is based around Nvidia chips. Nvidia says its next generation “Blackwell” AI chip designed for data centres will cost between $30,000 and $40,000 per unit⁴.
10. Stock market conditions: sticky “last mile” excess inflation has forced investors to rein back their expectations for interest rate cuts this year. Just one quarter point cut in the US now looks likely. Nvidia, like tech stocks in general, stand to do best when rates are low. Such conditions still look some way off.
11. Other risks include an unwinding of over optimism as the company’s real growth trajectory unfolds or a possible rise in geopolitical pressures in Taiwan where Nvidia’s chips are manufactured.
12. The early days of the internet showed that sifting the ultimate disrupters from the early winners is critical, even when the overall market is immense. Other US chipmakers – notably Intel and AMD – could pose threats to Nvidia’s leading market share. For now though, Nvidia is clearly the go-to provider for a market that is expanding very rapidly.

Fad or fortune?

Nvidia is undoubtedly the stock of the moment. Its quarterly results now set the tone for entire earnings seasons, as investors weigh up the relative merits of “stick-or-twist”.

Investors out of the stock may well be doing so with gritted teeth but an underlying belief the story will eventually collapse.

Those on the Nvidia train may be wondering how best to maintain an exposure to AI without risking giving up their previous gains if market conditions turn trickier.

How the professionals see it

It was only a matter of time before the managers of global and US equity funds divided into two camps. Generally speaking, the first camp believes wholeheartedly in the transformational effects of AI and the future part Nvidia has to play in them. That belief underpins substantial positions in Nvidia even with its current elevated valuation.

The second camp, tasked with keeping up with global markets, has tended to seek Nvidia alternatives trading on lower valuations. That task has become increasingly arduous of late, as investors have piggybacked on stocks such as ASML– the company that provides the lithography to build AI chips – or Taiwan Semiconductor – the actual maker of AI chips.

A further alternative route has been to invest in companies making more mundane components that are, nevertheless, vital in the operation of data centres and other AI-based systems. In some cases, this has also meant trading down the capitalisation scale towards mid-cap and smaller companies. Amphenol – an $80 billion US company that makes mission-critical electronic and fibre optic connectors – is one example of a stock recently bought by more than one fund popular among Fidelity’s personal investors.

Going the fund route

The beauty of funds at time like this is that they can be used to gain an exposure to the expected next big winners within a risk-controlled framework. The fund managers of active funds investing in global equities can decide what weight to apply to Nvidia and when to sell or buy more.

Nvidia is currently the top holding in the Rathbone Global Opportunities which features on Fidelity’s Select 50 list of favourite funds. At around 3.8%, the fund’s exposure to Nvidia is about the same as that of the MSCI World Index⁵.

Last month, James Thomson, lead manager of Rathbone Global Opportunities, was a panellist at Fidelity’s Wealth Management Investor Forum, at which he discussed Nvidia alongside the general makeup of his fund.

James is fairly unequivocal. “Nvidia is the representation of what is the beginning of a new computing generation,” he says. “If you think of computing generations like the mainframe generation, or PCs, then smartphones, and now we’re entering the AI generation”.

“We are on the cusp of the next industrial revolution and we can’t miss it”.

 Three best selling investment trusts at Fidelity illustrate how views differ. Ben Rogoff, manager of the Polar Capital Technology Trust, reports having a strong conviction in the powerful secular tailwind associated with generative AI. The trust’s favoured mega-cap companies are: Nvidia (11.7% of the portfolio) Microsoft, Meta and Amazon⁶.

Conversely, another global portfolio – Alliance Trust – recently reported it had reduced its positions in the “Magnificent Seven” mega-caps and other similar growth stocks in the belief that sentiment over AI had become excessively bullish.

In May, the trust confirmed it remains cautious about the high valuations of many US mega-cap tech stocks, while retaining a selective exposure through names such as Alphabet and Amazon. It owns a modest 1.7% exposure to Nvidia⁷.

Finally, for a truly contrary view, we need look no further than the Brunner Investment Trust, which has taken the decision to avoid Nvidia. In an interview with Citywire earlier this week, co-lead portfolio manager Julian Bishop discussed his reticence regarding Nvidia citing concerns about a ‘hugely concentrated’ client base and profit margins that may not be sustainable.

He said: “So, there’s two companies giving at least $8bn a year in profit to Nvidia. Those two companies have such an incentive to displace Nvidia.” He implied the company’s mega-cap customers will increasingly see the need to develop their own silicon in-house.

Bishop’s caution also reflects his concern that Nvidia’s customers have yet to turn a profit out of AI.

‘Today, no one’s actually making money. So, everyone’s buying these chips, but ChatGPT spouting out paragraphs of plausible text or doing pictures of Gavin on a unicorn, they aren’t actually making money today. So that makes us a little bit cautious⁸.’

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Sources:

¹ Bloomberg, 26 June 2024
² Bloomberg, 26 June 2024
³ Bloomberg, 23 May 2024
⁴ CNBC, 19 March 2024
⁵ Rathbones, 31 May 2024
⁶ Polar Capital, 31 May 2024
⁷ Alliance Trust, 31 May 2024
⁸ Citywire Funds Insider, 23 June 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rate. Please be aware that past performance is not a reliable guide indicator of future returns. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.