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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

None

Source: Refinitiv, 21.8.23

So what next?

Has the rally got ahead of itself? The company's valuation might suggest so. The stock's price-to-earnings ratio, which compares the share price to trailing 12-month earnings, exploded from roughly 50 in September 2022 to nearly 250 today. The median P/E ratio for all S&P companies is about 25.

The fortunes of the business are balanced between general chip demand, which is driven by demand for computer hardware, and the adoption of its AI technology, such as processors for training large language models - the likes of OpenAI’s ChatGPT.

But it’s the potential for the growth of AI - and Nvidia’s unique positioning here - that has really set the shares alight. Right now, Nvidia can’t produce components fast enough to meet demand, especially its GPUs, which dominate the market for training AI models. As chief executive Jensen Huang said: “The race is on to adopt generative AI”. And Nvidia is at the forefront of that race, right now.

China’s internet giants are rushing to acquire high-performance Nvidia chips vital for building generative AI systems, making orders worth $5bn in a buying frenzy fuelled by fears the US will impose new export controls.

What other risks does Nvidia face?

There are two major fears swirling around Nvidia and the future of AI. One is that Nvidia won’t be able to make enough chips, to meet the industry’s needs and that could mean the roll out of AI stalls. There are also concerns about possible new export restrictions.  

Export restrictions imposed by Washington last year, in a bid to choke Beijing’s technological ambitions, already means that Chinese tech companies can only buy A800s, which have slower data transfer rates than A100s. It’s been reported that Chinese companies Baidu, ByteDance, Tencent and Alibaba have made orders worth $1bn to acquire about 100,000 A800 processors from the US chipmaker, due to be delivered this year. The US has announced a ban from next year on some US investment into China’s quantum computing, advanced chips and AI sectors and there are fresh fears of new export restrictions that would capture even Nvidia’s weakened chips. For now the race is on to stockpile the A800 chips.

How can I get exposure to Nvidia in my portfolio?

Given it is such a large constituent in the US stock market, there is a good chance you already have exposure through funds in your portfolio. This may be enough for some investors; exposure through funds, which hold many stocks, is a sensible way to maintain diversification in a portfolio.

Plenty of fund managers have bought into Nvidia as its star has risen. Among them are James Thomson, who manages the Rathbone Global Opportunities Fund. He trimmed his holding in Nvidia recently, after it got close to the fund's 4% stock limit but it is still the largest holding in the fund. He says capacity constraints are “a risk to monitor over the coming months” though.

Other funds to hold the stock include Scottish Mortgage. Nvidia is the fund’s third-largest holding. And fellow investment trust, JP Morgan American, which bought Nvidia in December 2022 and is now makes up its seventh largest holding.

Our Select 50 list of favourite funds features two actively-managed funds with Nvidia as their largest holding. The first of these is the Brown Advisory US Sustainable Growth Fund, a concentrated fund looking for US-listed companies with a unique product or technology that enables them to have higher-than-average margins over the long term. The second is the Rathbone Global Opportunities Fund, a similarly concentrated fund that looks for long-term winners across the globe.

Alternatively, you can get exposure to Nvidia via the Vanguard S&P 500 UCITS ETF, a low-cost tracker fund that aims to follow the performance of the 500 largest companies listed on the US stock exchanges.

One notable exception is tech and innovation investor Cathie Wood. Her flagship ARK Innovation ETF sold out of Nvidia in early January. While she had long been a fan of the firm, she told CNBC in February that the valuation had simply become too stretched.

More on Nvidia

Five-year performance table

(%)
As at 31 July
2018-2019 2019-2020 2020-2021 2021-2022 2022-2023
Nvidia -31.1 251.6 83.6 -6.9 257.3

Past performance is not a reliable indicator of future returns

Source: Investing.com, share price return in US$ terms 31.7.18 to 31.7.23. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. 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. 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.

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