Nvidia's A.I driven Stock Surge Drove Its Earnings Multiple Three Times Higher Than Tesla's

In the aftermath of last year's market downturn in the technology sector, 2023 has witnessed a notable resurgence among all major players in the industry. However, one company has distinctly outshone its peers: Nvidia.

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Fueled by a substantial over-decade lead in artificial intelligence chips and software, which are now sought after throughout Silicon Valley, Nvidia's stock has surged by an impressive 180% this year, surpassing all other constituents of the S&P 500. The second-largest gainer in the index, Facebook parent Meta, has marked a 151% increase in value as of Friday's closing.

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Nvidia's current market capitalization exceeds $1 trillion, propelling it to the rank of the fifth-most valuable U.S. company, trailing behind technology giants such as Amazon, Apple, Microsoft, and Alphabet.

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Despite lacking the household recognition of its mega-cap technology counterparts, Nvidia's foundational technology serves as the bedrock for the most trending innovation of late—a product with the potential to disrupt realms ranging from education and media to finance and customer service. This disruptive entity is none other than ChatGPT.

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OpenAI's viral chatbot, heavily backed by Microsoft, along with AI models developed by well-financed startups, heavily relies on Nvidia's graphics processing units (GPUs) for their operation. Acknowledged as the premier chips for training AI models, Nvidia's financial projections indicate an insatiable demand for its products.

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The formidable H100 chips produced by the company, valued at approximately $40,000 each, are in high demand from entities like Microsoft and OpenAI, who are procuring them by the thousands.

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"Precisely put, Nvidia boasts the pinnacle of GPUs," affirmed Harsh Kumar, an analyst at Piper Sandler who advocates for the purchase of Nvidia stock. "And they are available today."

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Despite the evident momentum and the seemingly insatiable demand, Nvidia's stock price harbors a plethora of assumptions concerning growth. These include expectations of doubling sales in forthcoming quarters and nearly quadrupling net income within this fiscal year.

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However, some investors contend that the stock is currently priced for perfection. An examination of Nvidia's price-to-earnings ratio for the past year—standing at 220—reveals a remarkably high valuation, even when juxtaposed with renowned technology companies recognized for their elevated valuations. To provide context, Amazon's P/E ratio is 110, while Tesla's stands at 70, according to Trade Algo.

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Should Nvidia fulfill analysts' forecasts, the present valuation remains elevated in comparison to most of the technology industry. Nevertheless, the P/E ratio projected for the forthcoming 12 months—a value of 42—appears more reasonable. In contrast, Amazon and Tesla carry P/E ratios of 51 and 58, respectively, according to FactSet data.

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As Nvidia prepares to disclose its earnings later this month, analysts anticipate quarterly revenue of $11.08 billion—a marked 65% escalation from the previous year, as reported by Refinitiv. This figure slightly outpaces Nvidia's official guidance of approximately $11 billion.

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Investors are placing their bets on Nvidia's ability not only to ride the wave of AI in the short term, but to sustain its trajectory over the long haul. This is anticipated despite intensifying competition from industry contenders like Google and AMD, as well as the mitigation of potential supply-related issues.

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Nonetheless, the inherent risks associated with any stock that experiences rapid ascension are not to be dismissed. Nvidia shares witnessed an 8.6% decline this week, a significant drop in comparison to the 1.9% dip in the Nasdaq. This represents Nvidia's steepest weekly decrease since September of the prior year. Such abrupt declines without accompanying negative news underscore the potential volatility in Nvidia's valuation.

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WisdomTree analyst Christopher Gannatti reflected on this phenomenon, noting, "As investors, we must contemplate whether the excitement surrounding Nvidia's accomplishments and prospective endeavors is already reflected in its current performance. High investor expectations pose a formidable challenge for companies to surmount."

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Nvidia's Journey to the PresentWhile Nvidia's remarkable stock rally in the current year stands out, the truly remarkable trajectory emerges when considering the span of a decade. A mere ten years ago, Nvidia was valued at approximately $8.4 billion—a minute fraction of chip behemoth Intel's market capitalization.

In the years that ensued, Intel's stock experienced a 55% increase, while Nvidia's value expanded by an astonishing 11,170%, positioning it seven times ahead of its rival. For context, Tesla, whose stock soared during this period and propelled CEO Elon Musk to the position of the world's wealthiest individual, has appreciated by 2,279%.

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Nvidia's Founder and CEO, Jensen Huang, has seen his net worth burgeon to $38 billion.

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However, Nvidia declined to provide comment for this story.

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Prior to the advent of AI, Nvidia was predominantly recognized for its pivotal contributions to video game technology. The company, reportedly conceived in 1993 at a Denny's restaurant in San Jose, California, was responsible for creating processors that empowered gamers to render intricate graphics within computer games. Its flagship product was the graphics card—a combination of chips and boards that could be integrated into consumer PC motherboards or laptops.

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Video games continue to be a significant revenue source for Nvidia, with the company reporting over $9 billion in gaming sales in fiscal 2023. Nevertheless, this figure marked a 27% decline on an annual basis, partially attributed to the considerable sales of graphics cards early in the pandemic as individuals upgraded their home systems. Consequently, Nvidia's core gaming business continues to dwindle.

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However, it is the burgeoning AI business under Nvidia's data center division that captivates Wall Street. This unit witnessed a 41% increase in sales to $15 billion last year, surpassing the gaming division. Analysts anticipate a further than twofold surge to $31.27 billion in fiscal 2024. Analysts assert that Nvidia commands over 80% of the AI chip market.

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Nvidia's foray into AI chips can be traced back 15 years. In 2007, the company introduced a relatively inconspicuous software package and programming language called CUDA, which enables programmers to harness the full spectrum of a GPU chip's hardware features.

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This software was swiftly identified as effective for training and operating AI models, and CUDA has since become an integral component of the training process.

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By utilizing CUDA and Nvidia's GPUs, AI firms and programmers are less inclined to switch to competitors such as AMD's chips or Google's Tensor Processing Units (TPUs). Patrick Moorhead, a semiconductor analyst at Moor Insights, underscored Nvidia's strategic advantage, explaining, "Nvidia currently enjoys a dual advantage—possessing the highest performance training hardware, along with software libraries and CUDA."

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In its journey of growth, Nvidia has taken measures to cement its leadership and live up to the towering expectations. In June, CEO Jensen Huang dined with Morris Chang, Chairman of Taiwan Semiconductor Manufacturing Co. (TSMC), the world's foremost manufacturer of chips for semiconductor companies. TSMC produces Nvidia's key products, and Huang expressed confidence in the foundry's reliability following the dinner, indicating that Nvidia had secured its necessary supply.

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Furthermore, Nvidia has emerged as a significant investor in the startup realm, particularly targeting ventures focused on AI models. Data from Pitchbook indicates that Nvidia has invested in at least 12 startups in 2023. These include prominent AI companies like Runway, which develops AI-powered video editing tools, Inflection AI founded by a former DeepMind executive, and CoreWeave—a cloud provider granting access to Nvidia GPUs.

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These investments offer Nvidia the prospect of an expanding customer base, potentially boosting both sales and diversifying the range of clients utilizing its GPUs.

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Certain startups have provided figures that emphasize the remarkable demand for Nvidia's technology. Harsh Kumar of Piper referred to statements from CoreWeave management, indicating that the company generated $30 million in revenue last year and has secured $2 billion in contracted business for the subsequent year. Kumar stated, "This trend reflects the demand for generative AI, voice-search applications, and GPU applications at large."

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Currently, Nvidia is approaching the midpoint of its ongoing GPU architecture cycle. The most recent high-end AI chip, the H100, is built on Nvidia's Hopper architecture, introduced in March 2022. Nvidia has hinted at the arrival of its successor in 2024.

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Prominent cloud providers, including Google, Microsoft, and Amazon, have declared their intentions to allocate significant investments for the expansion of their data centers, largely dependent on Nvidia GPUs.

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For the present, Nvidia is selling nearly every H100 chip it produces, and industry participants frequently express challenges in acquiring GPU access following the launch of ChatGPT late last year.

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Huang acknowledged ChatGPT's transformative impact, comparing it to the iPhone moment for AI, during Nvidia's annual shareholder meeting in June. He projected, "Generative AI has inaugurated a new era of computing and is poised to rival the transformative influence of the Internet."

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Investors are aligning themselves with this narrative. However, as evidenced by this week's volatile trading, they are equally prompt to respond with selling pressure in the face of company-specific or broader market uncertainties.

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