You’d be hard-pressed to find someone who hasn’t at least heard about Nvidia (NVDA), particularly given its recent meteoric rise. This week was another headline grabber for the chip maker, as its market cap surpassed Microsoft on Tuesday to become the most valuable company in the world, with a valuation of $3.33 trillion (yes, with a “t”). While Nvidia’s first stay at the top spot was brief (shares fell throughout the rest of the week), its journey to the top was truly unprecedented.
Nvidia was founded in 1993 with the goal of designing computer chips that would accelerate computing, particularly in graphics processing. After years of development and many setbacks, they finally produced a graphics card that stood above all competitors. They earned a reputation for having the best cards for high-end computer games. However, while the gaming market is large, more would be needed to make it the most valuable company in the world.
As technology developed over the next 30 years, Nvidia continued to stay proactive in its mission to have the best chips for accelerated computing. They saw the need for chips designed to fulfill the computing needs of data warehouses that store and analyze large quantities of data. With the combination of gaming and data center chips, Nvidia remained a strong and growing company through early 2022.
But it wasn’t until late 2022, when the artificial intelligence craze kicked off with the release of ChatGPT, that Nvidia truly started to go parabolic. What began was effectively an arms race (but with computer chips) to support the enormous data sets and processing needs of the AI models. This had companies like Alphabet (GOOG), Amazon (AMZN), Tesla (TSLA), Meta (META), Microsoft (MSFT), and others buying as many of Nvidia’s H100 chips as possible. There were reports of these companies buying tens to hundreds of thousands of these chips for their own data centers. Mind you, these chips are estimated to cost between $25,000 and $30,000 each.
Given these numbers, it’s probably not too hard to understand how Nvidia’s sales shot through the roof. The chart below is an excellent visual of how their sales went from good ($5 to $7 billion per quarter) to unbelievable (last quarter was over $26 billion) in less than a year. Moreover, it shows how they went from a company selling high-end gaming chips to a company supporting AI’s future.
And due to the insatiable demand for Nvidia’s top-end chips, it’s no wonder its stock price has surged even faster than its sales. The shares are on an absolute tear, up more than threefold in the past year alone. The rise from a $1 trillion market cap to $3 trillion was the fastest ever (see below).
Not only that, but it is also playing an outsized role in overall market performance. Now, as one of the top three holdings in the S&P 500 (Nvidia, Microsoft, and Apple are all very close in total market cap), its performance has a dramatic impact on the index overall. Specifically, this year, Nvidia accounts for almost one-third of the total S&P 500 increase. Pretty mind-boggling.
So, where will Nvidia go from here? Is it overvalued, undervalued, or perfectly priced? Plenty of analysts will make the argument for each of those cases. What can be said with a fair degree of certainty, though, is that Nvidia is the clear leader in AI-related processing solutions, and it will take a significant effort from competitors to eat into their 80% market share.
Economy
- Markets were up slightly in a very quiet trading week. The S&P 500 was up 0.6%, the Nasdaq was flat, and the small-cap Russell 2000 was up 0.8%.
- U.S. retail sales edged up 0.1% MoM in May following a downwardly revised 0.2% fall in April and below forecasts of 0.2%, in another sign consumer sentiment is cooling.
- Building permits in the U.S. fell by 3.8% to a seasonally adjusted annual rate of 1.386 million in May, the lowest since June 2020 and below market expectations of 1.45 million.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Energy were the top performers, while Utilities and Real Estate lagged. Value stocks led growth stocks, and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased four basis points to 4.26% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by corporate bonds and government bonds.
