- European markets wake up to another global surge in tech stocks
- Nvidia earnings send stocks rocketing as company sees AI ‘tipping point’
- Nvidia’s growth spurs investor confidence in AI, semiconductors
Artificial intelligence and semiconductor stocks rallied late Wednesday during after-hours trading after Nvidia wowed Wall Street with its Q4 earnings. Investors seem to bet on more demand for “picks-and-shovels” in today’s AI-gold rush, echoing dot-com optimism according to some.
Nvidia, renowned for its AI chips catering to tech giants such as Amazon, Microsoft, and Google, witnessed a surge in demand for its graphics processing units amidst the ongoing AI boom. The news propelled the already skyrocketing shares by nine percent during after-hours trading, mirroring a similar upward trajectory across the entire supply chain.
‘Continued growth’
“Fundamentally, the conditions are excellent for continued growth” in 2025 and beyond, Nvidia CEO Jensen Huang told analysts on Wednesday during the earnings call. He added that demand for Nvidia GPU chips will remain high due to generative AI and an industry-wide shift away from central processors to the accelerators that Nvidia makes.
“People think that the Nvidia GPU is just a chip, but the Nvidia Hopper GPU has 35,000 parts. It weighs 70 pounds. These are really complicated things we’ve built. People call it an AI supercomputer for good reason,” Jensen Huang said.
The reference to «picks-and-shovels» in today’s AI-gold rush draws a historical parallel from the 19th-century gold rush in Alaska, where prospectors flocked to strike it rich by searching for gold. However, not everyone found success in digging for the precious metal, leading to the emergence of a secondary market for tools essential to mining, such as picks and shovels.
Investors soon realised that while individual success in finding gold was uncertain, supplying the necessary tools guaranteed a steady demand and profit. This concept has been applied to modern investing, particularly in the tech sector, with «picks-and-shovels» representing the underlying technologies and components essential to emerging trends.
In after-hours trading on Wednesday, Taiwan Semiconductor Manufacturing Company (TSMC), a pivotal supplier for Nvidia and Apple, observed a 3.2 percent increase. Super Micro Computer, a server component supplier, saw a 11.4 percent surge. Additionally, Dutch chip equipment manufacturer ASML, essential for chip production, experienced a 2.7 percent uptick in U.S. trading post-market.
‘Most important stock on earth’
Nvidia has significantly capitalised on the recent tech sector’s fascination with large-scale artificial intelligence models. The company reported a staggering 240 percent surge in revenue compared to the previous year, amounting to a total of 20.6 billion dollars. Its shares a the major component of equity portfolios positioned to benefit from the AI megatrend.
The stock has nearly quintupled since the end of 2022, propelling its market capitalization to 1.7 trillion dollars, almost surpassing industry titans like Amazon and Alphabet. Analysts at Goldman Sachs acclaimed Nvidia as «the most important stock on earth,» underlining the lofty earnings expectations set by Wall Street.
‘Don’t overpay’
Some market participants caution against the exuberance surrounding chip stocks, especially amidst soaring valuations. Drawing parallels with the dot-com bubble era optimism, when the market overpaid for momentum.
«People investing in Nvidia as the AI ‹picks and shovels› may wish to heed the lessons from history as they are currently paying 40 times revenue,» said Sean Peche, portfolio manager at Ranmore Fund Management.
Peche delineated the disparity between Nvidia and Cisco during the dot-com bubble, highlighting that Cisco’s major clients were not all engaged in developing their solutions, unlike Nvidia’s scenario with AI.
Additionally, he flagged the geopolitical challenges entwined with chip manufacturing in China today. While acknowledging the transformative potential of AI and Nvidia’s leadership position, Peche advocated against overvaluing ‹picks and shovels› stocks.
The valuation of Nvidia, while appearing lofty in comparison to the S&P 500, remains considerably lower than the earnings multiples witnessed by telecom-hardware firms such as Cisco during the zenith of the dot-com frenzy. when the company traded at an earnings multiple exceeding 150 times during the dot-com era.
In contrast to the dot-com era, some analysts argue that current valuations in the broader S&P 500 index - trading at a multiple of 22 - do not reflect levels of exuberance akin to the peak of the dot-com bubble when a multiple of 28 was average.