Chronicle - Feb 25, 2024
NVIDIA Mania: During the Gold Rush, Sell Shovels
In this earnings season, the most anticipated report came on February 21st: the chip maker giant, NVDA 0.00%↑. It did not disappoint investors with 486% growth in quarterly earnings versus previous year, and 288% growth in full year earnings. The company also provided guidance for next quarter that is above analysts’ consensus.
An overnight success?
Founded on April 5, 1993, by Jensen Huang, Chris Malachowsky, and Curtis Priem, NVIDIA came with a vision to bring 3D graphics to the gaming and multimedia markets. In 1999, they invented graphics processing unit (GPU), a computer chip that renders graphics and images by performing rapid mathematical calculations. GPU processes many pieces of data simultaneously, essential for video editing, gaming applications, and… machine learning. When crypto boom started several years ago, NVIDIA provided GPU Miner Tool, which is an essential tool for cryptocurrency miners. GPUs are useful in blockchain mining due to their speed and efficiency.
Many say that today is the era of artificial intelligence (AI). It is a huge moment for the tech industry that has not been seen in a decade. Nowadays, people are familiar with ChatGPT or AI editing software. In fact, AI are useful in many (if not all) sectors, from manufacturing, transportation, defense, finance, healthcare, just to name a few.
But, who profits the most? With more than 80% of AI chip market share, NVIDIA is clearly a big part of AI industry, and maybe the biggest gainer up to this day. This is a perfect example of “during the gold rush, sell shovels”. During the AI rush, sell AI chips.
Success does not come overnight. People were talking about AI things lately, but NVIDIA has prepared for this moment more than a decade ago. As Jensen Huang wrote on the company website in January 2016:
By 2011, AI researchers around the world had discovered NVIDIA GPUs. The Google Brain project had just achieved amazing results — it learned to recognize cats and people by watching movies on YouTube. But it required 2,000 CPUs in servers powered and cooled in one of Google’s giant data centers. Few have computers of this scale. Enter NVIDIA and the GPU. Bryan Catanzaro in NVIDIA Research teamed with Andrew Ng’s team at Stanford to use GPUs for deep learning. As it turned out, 12 NVIDIA GPUs could deliver the deep-learning performance of 2,000 CPUs. Researchers at NYU, the University of Toronto, and the Swiss AI Lab accelerated their DNNs on GPUs. Then, the fireworks started.
Skyrocketing stock, skyrocketing valuation?
Since the beginning of the year until last Friday, both the S&P 500 and Nasdaq-100 have gained about 6.7% while NVDA gained 59.2%. Over the last 12 months, the stock went up by 233%!
With market cap just slightly below $2 trillion, one question arises: is it overvalued?
Looking at our projection, NVDA will produce a $24.17 adjusted EPS this year, implying a 32.6x forward P/E ratio. Not a cheap multiple but not an expensive one either, considering its growth rate. Even AAPL 0.00%↑ with stagnant growth is currently traded at 27.8x forward P/E ratio. Moreover, among Magnificent 7 stocks, NVDA has the best profit (EBITDA) margin.
With this valuation, risks persist: general stock market downturn caused by any negative sentiments, company’s below-than-expected quarterly earnings, sudden decelerating growth of AI demand, geopolitical tension, or other factors. Any major pullback may provide a better long-position for investors, if any.
IPO — New Listing
CHRO 0.00%↑ Chromocell Therapeutics Corp, a clinical-stage biotech company focused on developing and commercializing new therapeutics to alleviate pain.
WETH 0.00%↑ Wetouch Technology Inc. Through its wholly-owned subsidiaries, the company is engaged in the research, development, manufacturing, sales and servicing of medium to large sized projected capacitive touchscreens.
DYCQU 0.00%↑ DT Cloud Acquisition Corp, a blank check company.
IPO — Performance
