Can Nvidia live up to the hype?

CHIPMAKER Nvidia Corp (NVDA) has rarely been out of the headlines this year. It has become the posterchild of artificial intelligence (AI), with its advanced chips expected to underpin the revolution in artificial intelligence.

Here’s what you need to know about the seemingly unstoppable rise of the world’s most valuable chipmaker.

I’ve heard of Nvidia, why?

You rarely read anything on AI without the name Nvidia being mentioned. The company has become synonymous with the revolution in machine learning, a revolution that promises to reach all industries.  

What does the company do?

It designs GPUs (graphics processing units) and APIs (application programming interface), used in data science and high-performance computing. These are used in applications in such fields as architecture, engineering and construction, media and entertainment, cars, scientific research and manufacturing design. There are also high hopes for its Omniverse product, a tool for building and designing in the metaverse.

What is the expectation?

Put simply, the expectation is sky high. The shares have risen 212% since the start of 2023; they have gained 11% in the last seven sessions alone. Then late last night, second quarter earnings came in ahead of expectations. Please note past performance is not a reliable indicator of future returns.

Its earnings update came out after the closing bell on Wednesday and showed a doubling in quarterly revenue and a promise of more of the same to come. The numbers exceeded analysts’ expectations, sending the shares up almost 10% in after-hours trading in New York last night. The icing on the cake was news of a $25bn (£19.7bn) share buyback.

Expectations were already high. Earlier this week Nvidia was one of 11 stocks named by Goldman Sachs as near-term beneficiaries of the "AI revolution." The analysts said an equal-weighted basket of those 11 stocks had returned 69% so far in 2023, outpacing a 7% gain for the overall equal-weight S&P 500. "Some of these stocks have already seen 2024 earnings per share estimates rise on the back of AI adoption, with Nvidia representing a notable example," they said.  

After the results, enthusiasm only stepped up further, perhaps bordering on hyperbole. Angelo Zino, an equity analyst at CFRA, told Yahoo Finance that Nvidia will be the "most important company to civilization" over the next five to 10 years because every enterprise company will be reliant on the chipmaker directly or indirectly.

Has its rise been unprecedented?

Nvidia shares, before the market update, were up 315% since last October; no other S&P 500 company had gained more than 128% over the same period. Back in May, its last earnings update prompted a 24% rise in its shares and the entire S&P 500 technology sector basked in its glow, rallying 8% over the next five days. Now its second-quarter report has done it again, also lifting shares in Microsoft and Meta Platforms, among others.

Nvidia is widely pitched as the crucial infrastructure provider for the AI revolution — whatever AI becomes, we are told, it will use Nvidia chips to become it. Those who remember the dotcom era might think that sounds familiar. Cisco was touted as the crucial infrastructure provider for the internet revolution — whatever the internet became, we were told at the end of the last century, it would use Cisco switches and routers to become it. The shares soared and then slumped when the technology bubble burst between 2001 and 2003. As the FT’s Robert Armstrong noted this week

 “Cisco has gone from $64 to $54 over the intervening 23 years; include dividends, and investors are just about breaking even. It’s been a horrible couple of decades, and the crucial point about its horribleness is that Cisco’s underlying results over the period have been very good.”

It is a comparison worthy of consideration.

Global excitement around the business potential of artificial intelligence has certainly helped propel the S&P 500 to a 14% gain this year. And Nvidia is a large part of that excitement. But it’s not alone - the so-called ‘Magnificent Seven’ group of megacap stocks, which includes Apple and Microsoft, has collectively been responsible for roughly two-thirds of the S&P 500’s increase this summer.

Top stock weights in the S&P 500

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