Nvidia Gatecrashes the $1 Trillion Club - Is Now the Time to Invest?

Methodology

Nvidia Gatecrashes the $1 Trillion Club - Is Now the Time to Invest?

Last Tuesday, May 30th 2023, Nvidia became the latest company to hit a market capitalization of $1 trillion, joining the likes of Apple, Alphabet, and Microsoft.

The reason for this sudden rise was the increased demand for AI-related hardware, following the introduction of Open AI’s new, disruptive technology, ChatGPT.

Demand particularly surged for Nvidia’s H100 chips, which have been described as the world’s first computer chip for use with generative AI. The chips enable AI systems that are able to rapidly produce human-like content, images, and text.

With ChatGPT representing the hot technology of today, Nvidia has seemingly cemented itself a dominant position as a supplier for companies that are expected to roll out their own AI services and tools using the technology.

However, it is not currently clear what the future holds for AI technology, with regulators, for example, considering how to supervise the implementation and use of the technology. This represents a risk to Nvidia, which could significantly devalue its position as a supplier of AI hardware.

So, with Nvidia hitting an all-time high stock price, is it now the right time to invest in the company?

The positives

In addition to its H100 chips, the company announced a whole host of additional AI offerings on May 28th.

The products introduced included DGX GH200, which is a new AI supercomputer platform that is designed to help firms create similar services to Open AI’s ChatGPT. Firms like Microsoft and Alphabet are anticipated to be among the first clients to use the new platform.

Nvidia also announced a partnership with advertising giant, WPP, with whom it will work with to produce lower-cost adverts using generative AI technology.

From this, it is clear that a big plus for investors is that Nvidia is positioning itself as a leader in the provision of AI solutions. With the demand for AI technology strengthening, primarily due to firms hoping to profit from the AI ‘revolution’, the potential for Nvidia to grow its revenue is enormous.

The company has already forecasted that revenue will hit $11bn for the current quarter, which is almost $4bn more than the $7.15 bn predicted by analysts. This is largely fueled by increased sales of the firm’s AI solutions, which are expected by commentators to eventually take the firm to a $2 trillion valuation.

Although this is purely speculation, Nvidia does have a solid track record in growing its revenue. Across the last 5 years, revenue increased from $11.72bn to $26.97bn, representing a 130.119% increase. With that said, it is important to note that net income growth has been less impressive, with the firm delivering net income of $4.14bn in 2019 and just $4.37bn in 2023.

Risks

From a purely financial viewpoint, Nvidia is massively overvalued. This is best represented through the P/E ratio of the stock, which currently stands at 204.38.

While this level of valuation is normal in the tech sector, with companies like Tesla previously having a P/E ratio of over 1,000, it represents a significant risk for investors.

If the hype surrounding Nvidia’s AI developments does not translate into increased earnings, it is likely that the stock price will take a substantial hit. With the P/E ratio being so high, there is little margin of safety for investors.

Despite many claiming that the AI developments introduced by Nvidia will take the company to a $2 trillion valuation, concerns exist surrounding the ability of the company to actually keep up with demand.

Supply has been an issue for the company before, with the company being unable to keep up with demand for its RTX 30-series graphics cards from 2020 to 2022. At the time, CEO, Jensen Huang, stated that he expected “demand to far exceed supply” and that the firm didn’t have “any magic bullets in navigating the supply chain”.

Although Huang outlined in a recent interview that the company had a buffer of AI chips, as the firm started manufacturing in August 2022, he admitted that the “new demand was incredibly steep”.

This indicates that Nvidia will likely suffer from the same supply issues with their AI chips, which could hit the company’s ability to meet global demand.

This should be a significant concern for investors as the firm may lose a sizeable proportion of market share to competitors, such as ARM Holdings.

Arguably the greatest risk for the AI prospects of Nvidia, however, is if the technology is heavily regulated or even restricted. Though ChatGPT has sparked what some would say is the next industrial revolution, the consequences of the widespread use of AI are uncertain, with many citing that the technology is an existential threat.

Should regulators take the view that AI technology is too harmful for widespread use in society and take radical action against it, it would likely make Nvidia’s AI offerings redundant.

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