In mid-2023, Nvidia (NASDAQ: NVDA) stock exploded higher, taking the tech company’s valuation above $1trn for the first time. Then in February, it topped $2trn. Today, it’s approaching $3trn.
To clarify, we’re talking trillions here!
If shares of Microsoft and Apple don’t move, Nvidia would overtake both with a further 13.5% gain and become the world’s most valuable company.
To add around $2trn in market value in a year is mind-boggling stuff. I doubt we’ll witness this again for many years, if ever.
A seminal moment
ChatGPT, the large language model (LLM) developed by OpenAI, was launched on 30 November 2022.
In the 12 months before that, Nvidia stock had lost around 50% of its value. In the 12 months after, it nearly trebled. Clearly then, the release of ChatGPT was a seminal moment.
Back then, the stock was trading for $158. Now, it’s at $1,148. So if I’d invested £2,000 into the stock at the time, I’d have around £14,525 on paper today.
That’s a 626% gain in just 18 months.
Another blowout quarter
The next industrial revolution has begun — companies and countries are partnering with Nvidia to shift the trillion-dollar traditional data centres to accelerated computing and build a new type of data centre: AI factories.
Jensen Huang, founder and CEO of Nvidia, 22 May 2024
The insatiable demand for Nvidia’s graphics processing units (GPUs), which are used to train LLMs like ChatGPT and Gemini, shows no sign of slowing.
In the first quarter, the firm again reported numbers to make a calculator blush. Revenue surged 262% year on year to a record $26bn, with its data centre business leading the way with 427% growth.
Data centres, where the AI revolution is taking place, are essentially the brains of the internet. And they’re gobbling up Nvidia’s GPUs as artificial intelligence (AI) creates a growing demand for processing power.
The firm’s earnings per share (EPS) skyrocketed 629% to $5.98, easily beating Wall Street’s consensus estimate of $5.59.
The company also announced a 10-for-1 stock split that goes into effect on 7 June. Splits tend to get a lot of attention, but nothing really changes except for the price. The analogy often used is a pizza being cut into smaller pieces without actually increasing the amount of pizza.
Is the stock overvalued?
When a stock rises over 600% within two years, I’d expect gross overvaluation to be a given. However, that doesn’t appear to be the case here.
The stock market is forward-looking, so it’s arguably better to look at the forward price-to-earnings (P/E) ratio. Currently, Nvidia is trading on a forward P/E multiple of 42.
That’s not outrageous for a company literally powering the AI revolution, in my opinion.
For context, shares of Cisco, a leading provider of internet networking equipment, were trading on a P/E multiple above 100 during the dotcom bubble. And Cisco wasn’t growing as rapidly as Nvidia.
The one concern I do have though is that customers might be over-ordering GPUs and therefore pulling forward demand. That could mean a steep drop-off in sales at some point.
This is why I’ve favoured buying shares of chipmaker Taiwan Semiconductor Manufacturing Company lately. But as things stand, it’s hard not to be optimistic about Nvidia given its dominance in AI chips.
