Nvidia Nailed Bet on AI Trend in Surge Toward $1 Trillion
(Bloomberg) -- Nvidia Corp. has a knack for riding tech trends — selling graphics chips that powered everything from the video game boom to the rise of cryptocurrency and the industry’s big bet on the metaverse.
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But arguably no trend stands to benefit the world’s most valuable chip company more than the rise of artificial intelligence. Nvidia’s 24% surge on Thursday pushed it within grasp of a $1 trillion market capitalization, a level that would rank it among the tech elite including Apple Inc., Microsoft Corp., Amazon.com Inc. and Alphabet Inc.
“I’d be reluctant to say it has won the race, but it is winning right now,” said Zeno Mercer, senior research analyst at ROBO Global.
Following an AI-fueled sales forecast this week that blew Wall Street targets out of the water, Nvidia’s value grew $184 billion on Thursday. That was the third-biggest one-day gain in market capitalization in the US ever. Nvidia climbed an additional 2.5% on Friday, putting its valuation at $963.2 billion.
Nvidia was co-founded in 1993 by Jensen Huang, who still runs the company. It proved more successful than its peers at developing chips that turn computer code into the realistic images that computer gamers love, and rode out a wave of consolidation that saw its rivals acquired, bankrupted or merged into larger companies.
Under Huang, the company then pushed its technology into new markets, such as data center servers and artificial intelligence processing — a move that’s proving prescient today. In less than a decade, Nvidia’s data center business has grown from $300 million in annual revenue to $15 billion. The chipmaker has won orders to equip giant computing factories by successfully arguing that graphics chips can handle AI workloads better than more standard processors.
The company’s latest forecast spotlighted that progress. Sales in the three months ending in July will be about $11 billion, Nvidia said late on Wednesday, shattering an average analyst estimate of $7.18 billion.
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“We’re seeing incredible orders to retool the world’s data centers,” Huang told analysts on a conference call. A trillion dollars of data center infrastructure will be upgraded to handle so-called accelerated computing, he said, letting them run generative AI tools such as ChatGPT. “The budget of a data center will shift very strongly to accelerated computing.”
It’s become common for tech companies to talk up their artificial intelligence prospects during earnings conference calls. References to AI soared after the launch of ChatGPT in November, and they don’t always spark a stock rally.
But Nvidia has now become the model of a company that’s actually making money from AI. It’s the seller of picks and shovels in the gold-rush analogy.
And that’s brought it to a historic threshold: Crossing $1 trillion valuation would be a first for the semiconductor industry. Even Intel Corp., a Silicon Valley pioneer and the company most synonymous with computer chips, never came close.
Nvidia eclipsed Intel in market capitalization in 2020, and the companies have only grown further apart. Nvidia’s current valuation is eight times that of Intel, despite the company having far less revenue.
Nvidia’s success has made investors even gloomier about Intel. While many chipmakers saw their stocks gain in the wake of Nvidia’s blockbuster earnings report this week, Intel actually fell.
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Nvidia is also benefiting from a broader rebound in technology spending. The chip industry is recovering from one of its periodic slumps, and many companies — even Intel — are looking for demand to improve in the second half.
But the swing will be particularly dramatic for Nvidia. It’s poised to go from flat sales in the current fiscal year to a 45% gain in 2024.
“They may be in a unique position,” Sanford C. Bernstein analyst Stacy Rasgon said on Bloomberg Television. “Is it a one-time thing or is this the new normal? I don’t know.”
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Huang, 60, is the longest-serving CEO of a major tech company but runs the business like a startup. He is known for making snap decisions and demanding rapid execution.
His big bets haven’t always worked out. Nvidia announced plans in 2020 to acquire Arm Ltd. for $40 billion, aiming to take control of chip technology that’s used in phones, factory machines and a wide range of other equipment. Huang had hoped to use Arm to bring AI to everything that has an on-off switch.
But Arm’s customers opposed the deal, which would have been the largest-ever in the chip industry, fearing it would compromise the British company’s neutrality. The US Federal Trade Commission sued to block the transaction in late 2021, prompting to Nvidia to walk away from the purchase in February 2022.
Now, that failed deal is a distant memory for Nvidia investors. The key question these days is how quickly Nvidia’s peers can cut its lead in AI. Advanced Micro Devices Inc. is working with Microsoft Corp., for instance, to ramp up its AI chip efforts.
“There is a broader AI ecosystem,” said ROBO Global’s Mercer. “While Nvidia will likely remain highly valued, the rest of the system will catch up.”
(Updates shares starting in fourth paragraph.)
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