Jen-hsun “Jensen” Huang, 61, the rockstar CEO of Nvidia, is basking in the company's recent success.
Nvidia is the undisputed leader in artificial intelligence (AI) chips, semiconductors that are considered the oil of the tech-driven modern world.
Huang’s net worth is currently estimated at $119 billion, according to Forbes, thus making him the 11th-richest person in the world.
Now, investors are again crazy (once again) about the new AI revolution. Nvidia produces advanced graphics processing units (GPUs) for high-end computing, expanding from gaming into data centres, autos, and AI.
Pain and suffering: Race to the top
Currently, Nvidia appears unstoppable.
With Huang at the helm, Nvidia topped the market capitalisation rankings on June 18, 2024, hitting $3.3 billion and overtaking Microsoft as the world’s most valuable company. The stock has rallied more than 160 per cent so far this year. On Thursday, Nvidia’s share price slid by 3.5 per cent, pushing it back to No. 2.
Nvidia’s story, its meteoric rise, is one shaped by “pain and suffering”, as Huang puts it. The stock has boomed thanks to the growing demand for its chips, used to train and run powerful AI models like ChatGPT (OpenAI), Bard/Gemini (Google), and Grok (X).
How did he get there?
Nvidia is not exactly a household name the way Apple and Microsoft have been for decades. It started out as a manufacturer of video game hardware. They built graphics accelerators for games like World of Warcraft or Call of Duty.
Huang, a US-educated electrical engineer, co-founded Nvidia in 1993 at age 30. He attributes his company's success to a willingness to learn from mistakes, and making it part of the company culture.
About 10 years ago, Huang realised that their chips that were doing these kind of 3D renderings could be repurposed to develop powerful artificial intelligence systems.
Today, current numbers go in Nvidia’s favour: Its annual revenue has more than doubled since 2020, and its stock price up more than 700 per cent in the past five years.
As for AI, Huang recently declared: “In the last 40 years, nothing has been this big. It’s bigger than PC, it’s bigger than mobile, and it’s gonna be bigger than the internet, by far.”
Competition heats up
Notably, Nvidia was already a substantial company before AI's rise. It is also focussed on GPUs for gaming, professional workstations and crypto mining. Demand for NVID IA's H100 accelerators is skyrocketing, propelling their sales over 125 per cent last year.
Nvidia's competitive advantage, solid management, and financial strength meet all the criteria for a quality growth company.
Over the past six years, its revenue has grown from nearly $7 billion in 2017 to just under $27 billion in 2022. In its 2024 fiscal year, Nvidia recorded revenues of $60.9 billion. Nvidia's success isn't limited to AI. They also benefited from the Bitcoin mining craze, which saw a surge in sales of their graphics cards.
Nvidia is currently the biggest maker of discrete GPUs (separate graphics cards for computers), especially in the high-end, high-performance gaming and AI GPUs. Their GeForce RTX series is a popular choice for gamers.
Intel: But if you consider all types of GPUs, including integrated graphics processors built into CPUs (central processing units), Intel remains the biggest maker. This is because Intel CPUs are widely used in personal computers. Intel holds the largest market share for integrated graphics processors found in most personal computers. Their Intel Xe graphics are becoming more competitive in the discrete GPU market.
AMD: Another major player in the GPU market, particularly for discrete GPUs. Their Radeon RX series competes with NVIDIA's offerings. While they might not be the leader, they are a significant force.
Upside and downside risks
Antonio Ernesto Di Giacomo, a market analyst at xs.com, said the primary driver behind Nvidia's stock value surge is the strong demand for its AI chips.
“These chips, crucial for developing and operating AI systems, have seen unprecedented demand across various sectors, from technology to automotive and healthcare.”
Another factor: the imminent restructuring of the SPDR Technology Select Sector Index.
“This restructuring will substantially increase Nvidia's weighting in the technology ETF (Exchange Traded Fund), attracting more investors and funds to its stock. This strategic change has generated renewed optimism among investors, who see Nvidia as a solid tech company and a safe bet for the future,” said Di Giacomo.
Another analyst, however, points to potential risk due to dependence on specific market segments.
Given the fact that demand for Nvidia chips is currently outstripping the available supply, the company will continue grow in the near future. Eryk Szmyd, analyst at XTB Financial Markets, noted that Nvidia is hiking margins and dominating a market niche that is very difficult to enter.
However, as it reaches dizzying valuations, currently trading at 118 times earnings, it’s hard not to recall another tech company whose stock once commanded similarly high premiums: Cisco Systems.
Nvidia euphoria
“The euphoria around Nvidia stock and artificial intelligence resembles that of the dot-com era, and to some extent comparisons to Cisco are valid,” Szmyd said in a market forecast, a copy of which was sent to Gulf News.
Cisco, which makes networking equipment that enables much of the internet, experienced tremendous growth as the web took off in the mid-1990s. Then the dot-com bubble burst.
Cisco shares plummeted 88 per cent, from $79 to a low of $9.50 two years later, despite the company’s revenue remaining stable at nearly $19 billion in 2000, $22 billion in 2001, and about $19 billion in 2002. As the web hype faded, the premium investors vanished.
Over the next two decades, Cisco continued to grow, with sales reaching nearly $52 billion in 2022, more than double its 2000 figure. Its stock, however, has never regained its March 2000 peak (to $46.72 on Thrusday, June 20, 2024). It took 20 years for Cisco stock to recover from the dot-com crash on a total return basis.
Will the increase in GPU orders last forever?
“It is unlikely," Szmyd said, "or least will not always be as dynamic as at the beginning of the nascent trend.”
Still, even if a “crash” happens, it won’t put brakes on the entire AI trend, which is undoubtedly revolutionary.
“After all, Cisco's precipitous decline in 2000 was not a harbinger of the end of the Internet revolution, but the result of overly high stock valuations and widespread optimism that discounted the powerful growth rate too quickly. The question, therefore, should be not "if" but "when" Nvidia's shares will undergo a deep discount, said Szmyd.
