As Nvidia’s market value surpasses two trillion dollars, investment analysts praise the company’s vision and operational prowess. Despite Baillie Gifford’s reduced holdings due to stock surge constraints, director Stewart Hogg acknowledges Nvidia’s vast opportunity. Janus Henderson’s tech portfolio manager Richard Clode underscores the company’s pivotal role in the AI boom, projecting sustained growth.
The meteoric rise of Nvidia, the AI hardware manufacturer dubbed by Goldman Sachs analysts as ‘the most important stock in the world’, does have elements of surprise. Edinburgh-based asset manager Baillie Gifford added the stock to its portfolios in 2016, on the back of an upbeat growth outlook for virtual reality. Instead, it was deep learning that powered its surge. “Instead of being precisely wrong, we’d rather just be broadly right,” Hogg told Investment Officer.
The 34 percent surge since it posted better than expected earnings on 21 February, coupled with a 281 percent gain over the past year, has prompted questions about Nvidia’s sustainable growth and dot-com-like euphoria.
Amidst comparisons to the dot-com era, Nvidia stands out by selling tangible products, which distinguished the AI boom from past market bubbles. As CEO Jensen Huang put it last month, “We’re at the beginning of two industry-wide transitions: accelerated computing and generative AI.”
Earnings outpacing shares
Despite the stock price increase, Nvidia’s earnings have outpaced, keeping its trading multiples in check. CFO Colette Kress acknowledged supply constraints, forecasting demand to outstrip supply for their next-gen products. Analysts, like Joe Moore at Morgan Stanley and Bank of America’s Vivek Arya, have raised price targets amidst a potential over-ordering cycle. They are not the only ones to have done so.
Nvidia is a stock that helped many major equity portfolios outperform in recent years. Richard Clode, technology portfolio manager at Janus Henderson, said that Nvidia’s reference to having achieved a “tipping point”, makes clear that clear momentum now is underway in artificial intelligence.
From inflection to inferencing
“With any new technology, we believe that you have to build out the infrastructure first, So when we see a new technology inflecting like AI, the first thing we’re gonna do is build that infrastructure,” said Clode, speaking to Investment Officer from Denver. “Then what you have to build after that is the inferencing build-up. That’s when you use it, interacting with it, asking questions. That’s inferencing. That’s effectively kind of scaling out the product, the AI product itself, or the service itself. And we started to see that.”
With Nvidia at this tipping point, the company feels confident that its products and services now are generating real revenues. Indeed, the firm’s Q4 sales, at 22.1 billion dollars, came in 10 percent above its earlier projection. “They talked about how 40 percent of that was from their data centre business, which was a lot higher than people thought,” Clode said.
Science fiction
The transcript of Nvidia’s earnings call reads like science fiction. The company refers to data centres as ‘AI factories’ that convert raw data into ‘incredibly valuable tokens’ using these GPU-powered AI supercomputers. Such tokens are behind the experience that people have with AI applications like ChatGPT or Midjourney. Similarly, startups in digital biology use these tokens to generate new proteins and chemicals.
“Like AC power generation plants of the last industrial revolution, Nvidia AI supercomputers are essentially AI generation factories of this industrial revolution,” its CEO Huang said in the earnings call. ”Every company in every industry is fundamentally built on their proprietary business intelligence, and in the future, their proprietary generative AI.”
Early investor
Baillie Gifford was an early investor in Nvidia. Director Stewart Hogg explained the firm started researching the stock in 2013, had increased interest in 2015 and added it to its portfolios in 2016. Such an approach is typical for Baillie Gifford. “It could take years to allow us to gain conviction,” he said. “We want to think about the next five to 10 years.”
At the time, Nvidia’s appeal as a growth investment was in virtual reality, as a producer of computer graphics cards. Deep learning, ten years ago, was “still incredibly nascent” although the Baillie Gifford analyst saw some merit in aspects of the Nvidia business that were bordering on science fiction. The “extreme ultra blue sky scenario” at the time called for company with 500 billion dollar market capitalisation, Hogg explained.
“Now fast-forward to today, Nvidia’s market cap is nearly two trillion dollars,” Hogg said. “We underestimated the market by about one and a half trillion dollars. That just goes to show you how important it is, instead of being precisely wrong, we’d rather just be broadly right. We were completely wrong with the VR opportunity being the main driver of growth. It ended up being the deep learning opportunity.”
Market analysts like Clode and Saxo’s Peter Garny laud Nvidia’s record-breaking earnings, underlining its dominance in the accelerated computing and generative AI space. Despite concerns about overvaluation and geopolitical risks, retail interest soars, making Nvidia the top-traded stock on Capital.com.
Strong earnings trajectory
With the surge in mind, investors wonder about the price-earnings ratios. When Janus Henderson bought Nvidia, earnings expectations were for less than 6 dollars per share for 2024. Now, they’re going for “the best part of 25,” said Clode. He said he never had to contend with the valuation because of the strength of the earnings trajectory.
“The easy part of the journey has been that actually, despite the stock going up so much, the earnings estimates have gone up a commensurate amount,” he said. ”So actually, the P E of the stock today is actually no higher than when it was before it went up four times.”
That’s a different context than the disputed valuation of Cisco at teh time of the dot.com crisis, where Internet startups failed to deliver and caused the market to tank as the 2000-2001 Dot-com bubble burst.
As Nvidia’s valuation surpasses the 2.000 billion dollar mark, the market eagerly awaits its trajectory. Analysts predict sustained momentum, cautioning against potential disruptions. As Nvidia continues to shape the AI landscape, its strategic moves and market dynamics remain at the forefront of investment discussions.
Valuation ‘not necessarily’ more demanding
“Just because you see a share price rising, it doesn’t necessarily mean the valuation has become more demanding,” said Baillie Gifford’s Hogg. “It’s very clear that over the past couple of years, the operational progress of Nvidia has been pretty extraordinary.
For those learning more about the structural economic impact of AI, it makes one wonder if the market could be up for another long-term boom period, similarly to the 1980s and 1990s, both decades that kicked off with an economic slowdown. “I think that’s a very good way to characterise it, you know, this should lead to significant productivity boosts,” said Clode.
“There will be disruption to some jobs, for sure,” he said. “But generally, we see this as a technology that boosts productivity and ultimately should lead to more jobs and better paid jobs, because ultimately, the revenue potential for each employee should go up.”
‘Zero billion markets’
“What was a relatively potentially narrow market is suddenly winding up pretty significantly,” said Hogg. “Jensen Huang talks a lot about investing in zero billion markets. It’s his way of saying there is no market right now, but he believes that there will be one in the future. Those data centre revenues which we talked about, they are now doing 18 billion dollars in revenues per quarter, which was literally zero in 2016. So it’s the foresight of Jensen Huang and thinking about those opportunities. That’s really key.”
Baillie Gifford has been reducing its holdings in Nvidia on the back of the surge in its shares. The firm has set a maximum it can hold in any company at 10 percent. In the past Nvidia was acquired at 5 percent. “Nvidia is pushing against that 10 percent limit just because of its success,” said Hogg. “But it’s very clear that, looking at the Magnificent Seven stocks, there is a bit of irrational exuberance in the market around AI at the moment. We wouldn’t necessarily put that solely on Nvidia. Will we sell Nvidia? Very unlikely. The opportunity, as I talked about, still remains vast.”
Jensen Huang is due to make a major keynote speech on Monday 18 March at Nvidia’s GTC conference in California.
Further reading on Investment Officer Luxembourg:
- Picks-and-shovels strategies alive as Nvidia fuels AI gold rush
- Nvidia and dawn of generative AI mark a new investment era
- ‘Our growth stocks could increase fivefold’