On Wednesday, Nvidia jumped on the podium of the world’s largest companies as it became the third company to surpass a market capitalization of $3 trillion. A whopping $1 trillion of that market cap was added in just the past 96 calendar days.
Nvidia is joining this elite group and sharing seats with two other incumbents of the tech industry – Apple and Microsoft (MSFT).
By the end of yesterday’s stock trading session, Nvidia stock closed 5% higher at $1,224.40. Thus far in 2024, the stock of the company headed by a person who is now also one of the world’s richest individuals, Jensen Huang, has accumulated gains of 147.2% while it is also jumping nearly 2% in pre-market action this morning.
Nvidia Emerges as One of the Most Prominent Winners of the AI Boom
The rise of Nvidia and its market value has been primarily fueled by an insatiable appetite for chips that can sustain the workloads demanded by artificial intelligence applications and systems like ChatGPT from OpenAI and Claude from Anthropic.
As tech giants like Amazon (AMZN), Alphabet (GOOG), and Microsoft rush to stock up on these chips to strengthen their data center infrastructure, Nvidia has been steadily raising its prices, cementing its competitive positive in this segment of the market.
Nvidia reportedly controls 80% of the market for AI chips globally, which gives it an incredible edge, pricing power, and a sustainable moat. In the past year alone, its revenues have skyrocketed by more than 260% as the AI boom took off with the launch of ChatGPT in November 2022.
Compared to its two other peers, it took Nvidia significantly less time to get from $2 to $3 trillion. In the case of Apple, it took the iPhone maker 718 days while it took Microsoft a little less – a total of 649 calendar days.
“We are at the beginning stages of what we refer to as the Mother of All Cycles,” said Hans Mosesmann, analyst at Rosenblatt Securities, who has had a $1,400 price target on Nvidia since February when it traded below $800 per share.
He emphasized that the world is undergoing a new industrial revolution powered by artificial intelligence applications. Nvidia is at the epicenter of this movement as it provides the “plumbing” necessary to provide the components needed to support the computing power necessary to power these applications.
As for the company’s CEO, Jensen Huang, his fortune just rose to more than $100 billion – a level of wealth only shared by just 15 other people on the entire planet. Just 8 years ago, his net worth was $1.7 billion, primarily coming from his 3.7% stake in the chipmaker.
An Astronomical but Justified Valuation? Growth Story Supports the Numbers
The company’s fundamentals justify the astronomical valuation. In its latest quarterly results in May, Nvidia reported revenue of $26 billion, up over 260% year-over-year and triple analyst estimates. Profit soared sevenfold compared to a year ago.
Is Nvidia’s multi-trillion valuation justified? During its 2024 fiscal year, Nvidia produced revenues of $60.9 billion which resulted in a 126% leap compared to the previous period. Data center revenues saw a significant boost as they rose by 409% compared to a year ago during the last quarter.
Meanwhile, its net income stood at $29.8 billion resulting in a mind-blowing 581% increase compared to the 2023 fiscal year. This significant leap was primarily fueled by an increase in the firm’s gross margins, which moved from 59.2% to 73.8%.
Also read: Can Nvidia Keep Its Throne as King of AI? These Challengers Are Fighting to Take It
The market seems to be buoyed not by Nvidia’s current numbers but by the firm’s runway to keep growing both its top and bottom-line results. At the time, the firm’s price-to-earnings-to-growth ratio (PEG), a traditional valuation metric, stands at less than 1, which indicates that the firm could even be considered undervalued if its growth trajectory remains unchanged.
Market analysts from Bank of America emphasized that data centers will have to invest up to $500 billion to modernize their infrastructure to accommodate rising AI workloads. They stress that only 20% to 30% of those investments have been made thus far and it could take from 3 to 5 years to fully deploy those resources.
Comparably, Apple produced total revenues and net income of $383 billion and $97 billion, respectively, during its past fiscal year, while Microsoft generated $212 billion and $72.4 billion, respectively.
Nvidia would have to more than double its net income and it would have to more than triple its revenues as well to come close to Microsoft’s numbers.
The company’s growth remains the most relevant catalyst to propel – or even maintain – its current $3 trillion market cap. As long as the company can live up to the market’s significant expectations, its multi-trillion valuation may hold.
Nvidia Gears Up for 10-for-1 Stock Split
On 22 May, Nvidia announced that it would be splitting its stock into 10 to accommodate for the tremendous rally that its common shares have experienced in the past few years. According to the firm’s statement, the split will be completed at the end of the trading session on 7 June while the stock-adjusted volumes will come into effect on Monday, 10 June.
In addition, the firm said back then that it would be increasing its quarterly cash dividend by 150% to $0.10 per share, which would raise its current dividend yield to 0.04%.
Companies typically perform stock splits to adjust their share price to a level that is more appealing to retail investors. Although financial technology has made strides lately to introduce products like fractional shares that make high-priced stocks affordable to investors with a small available budget, splits may also be performed to allow investment funds with strict policies to acquire the firm’s shares.
Also read: Best Dividend Stocks to Watch in 2024
Stock splits do not affect a company’s profitability, valuation, or financial health at all. They only adjust the number of outstanding shares and are primarily performed to improve liquidity – although this may not necessarily be the end result.
Top Tech Firms Gain Increasingly More Influence on the Market’s Trajectory
Nvidia has rapidly become one of the most influential stocks in the marketplace and its weight on top indexes like the S&P 500 has been increasing as it is a market-cap-weighted equity benchmark.
As of 31 May 2024, the date of the index’s latest quarterly adjustment, the information technology sector accounted for nearly 31% of the benchmark’s entire portfolio. Meanwhile, its top 10 constituents, including Nvidia, accounted for 34.1% of the S&P 500’s value.
Some analysts worry that the index’s overreliance on the tech sector may be distorting the appraised performance of the entire market as this industry’s performance is not necessarily representative of the entire economy.
Single-handedly, and based on its current weights, a 10% positive move in Nvidia stock could result in a 0.7% in the value of the S&P 500 at the moment while a 10% move in the combined securities within the tech sector would result in gains exceeding 3% for the benchmark.
“If these names stop performing well … and we don’t see the rest of the market providing that support, that could potentially be a source of vulnerability,” commented Angelo Kourkafas from Edward Jones.
Meanwhile, Michael O’Rourke from JonesTrading emphasized that Nvidia itself has been providing a significant boost to the S&P 500 lately. He warned that this is a risk as a market correction on the stock is probably going to be hard felt in the equity market.
One thing is certain, Wall Street is currently in love with Nvidia as the company has emerged as the most notable winner of the AI boom among publicly-traded securities. Can this trend continue? As long as the growth story remains intact, it just might.