Exploring the Rise of NVIDIA and the Possibility of a Generative AI Bubble
Thursday February 22nd, 2024, was a monumental day in the history of Wall Street. NVIDIA, the leading global manufacturer of graphics processing units, saw a $277 billion increase in market cap and a 16.4% rise in stock price as their reported earnings for the fourth quarter vastly outperformed Wall Street’s forecast for the company’s earnings and sales. Since then, NVIDIA has only continued to ascend to new heights. With their results leading to a rally of optimism, as of March 13th, 2024, NVDA stock is up 90.82% since the start of 2024, surpassing Alphabet and Amazon and becoming the 3rd most valuable company in the world, with a current market cap of $2.3 trillion.
The explanation for this is rather simple: artificial intelligence. We are currently in a period of meteoric progress in the field of AI, fuelled by NVIDIA. The tech giant holds roughly 80% of the global market share in GPU semiconductor chips as of 2023, which are the key technological components required for AI.
GPUs, initially used for rendering video game graphics, have become vital in AI for their ability to perform thousands of calculations concurrently, meaning they are perfect for training neural networks, the backbone of generative AI.
“Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations” said Jensen Huang, founder and CEO of NVIDIA. His words make it abundantly clear that the company’s technology is leading the charge of the current AI boom, and they are reaping the benefits of it.
"The people who made the most money in the gold rush of the mid-1800s were the ones providing the tools to get the job done, not those hunting for the precious metal," said Russ Mould, investment director at AJ Bell.
"NVIDIA is effectively playing the same role today in this tech revolution."
On the other hand, the semiconductor designers’ unprecedented success and the recent surge in generative AI stocks brings back old sentiment of the dot-com bubble, leaving many wondering: are we in a bubble, and if so, when will it burst?
However, this time, there are a few key differences.
Firstly, there have not been any generative AI IPOs (Initial public offering[s]) yet, which were a key factor to the dot-com bubble bursting due to the swathe of IPOs and the low standard for listing companies at the time.
Secondly, investors are not over-borrowing money to invest in generative AI stocks. This is important as during the dot-com bubble, both retail investors and institutional investors had a high level of leverage, which is often a major factor for market crashes. If markets fall, leveraged investors may have to sell, leading to further price drops, beginning a downward spiral.
Therefore, the key factor which could cause a crash in the value of these generative AI stocks in the future is immense disappointment in the forecasts of the growth of the leading companies. One example is Snowflake, a data cloud company, whose stock fell by 20% in February 2024 after announcing poor guidance and a sudden change in the company’s CEO. With the revenue acceleration of companies such as NVIDIA, investors will eventually set their growth expectations past what is achieved by these companies.
NVIDIA’s spectacular rise has taken Wall Street by storm, leaving people wondering if this is the beginning of a generative AI bubble, noting the resemblances with the dot-com bubble which burst in 2000. However, with a current lack of generative AI IPOs and reduced investor leverage, it would require leading companies to fail to meet Wall Street’s expectations for future growth to cause a meaningful decrease in the value of generative AI stock any time soon.
Sources:
(Reuters, 2024) ‘Nvidia adds record $277 billion in stock market value’ https://www.reuters.com/technology/ai-leader-NVIDIA-rises-forecast-tops-wall-streets-lofty-goals-2024-02-22/
(NVIDIA, 2024) ‘NVIDIA Announces Financial Results For Fourth Quarter And Fiscal 2024’
(NVIDIA, 2023) ‘Why GPUs Are Great for AI’
(Nasdaq, 2024) ’5 Things to Know About Heavy Insider Selling on Nvidia Stock’ https://www.nasdaq.com/articles/5-things-to-know-about-heavy-insider-selling-on-NVIDIA-stock
(Forbes, 2024) ‘Why The Generative AI Stock Bubble Isn’t Popping Anytime Soon’
(Forbes, 2016) ‘7 Ways 2016's Tech Bubble Differs From The Dot-Com Disaster’
Image source: Ryan Young - https://www.wired.com/story/nvidia-hardware-is-eating-the-world-jensen-huang/