Shares in Nvidia have increased 20-fold over the last five years if that growth rate continues it will be joining the trillion-dollar club within two years, but will the growth continue?
Will Nvidia join the trillion-dollar club?
As I write, Nvidia is valued at $284 billion. For Nvidia to join the trillion-dollar club, Nvidia shares must quadruple. Is that likely? Well, I think it is possible — subject, of course to the normal caveats about the risk that shares can fall, and that what I am saying here is far from certain.
I can describe the reason for my bullishness in two words: Convergence and AI. I could add a third: ARM (as Nvidia is trying to buy my favourite UK tech, ARM, currently owned by SoftBank).
But before I explain the above, let me explain what is going on below the surface.
Revenue growth and P/E ratio
Let’s be clear, look at some fundamentals, and my bullishness could be confused with naivety. Revenue at the company has increased five-fold in the last five years. That’s impressive, but shares have increased 20-fold over the same period. You could be forgiven for saying hype in Nvidia shares has taken over, that share price growth has outstripped reality.
Not surprisingly, it has a high P/E — 86. Given that why am I so bullish, should I instead go back to school and learn some common sense?
Well, as it happens, I would love to go back to school — the older I get, the more I find things interesting. I am tempted to say education is wasted on the young. But I do have reasons for my bullishness on Nvidia shares.
Above I cited two words to summarise my optimism, why I think a trillion-dollar valuation for Nvidia is possible. But let me add to that a bit of news concerning Nvidia results.
In the latest quarter, which ended in April, revenue was up 39%, but revenue from its data centre business was up 80%. Gross profit margins also hit a new all-time high for the company — 65.1%.
What is the big deal about data centre revenue? Dara centre’s revenue might not sound that sexy, but the technology that sits inside Nvidia data centres is sexy, at least it is if, like me, you the thought of technology progress gets your pulse racing.
End of Moore’s Law
One of the reasons why Nvidia technology is such a big deal lies with the end or maybe pending end, of Moore’s Law. You probably know that Moore’s Law is named after Gordon Moore, co-founder of Intel, who back in 1965 observed that the number of silicon chips on an integrated circuit was doubling every two years. That prediction got tweaked by time so that Moore’s Law came to mean computers were doubling in speed every 18 months. Unfortunately, depending on what source you read, Moore’s Law has either ended or is close to finishing. This is bad news indeed for the likes of Intel.
The apparent death or imminent death of Moore’s Law is a big deal. Personally, I think we will see a new Moore’s Law applied to different computer technology emerge, such as quantum computers — Rose’s Law, for example, predicting a doubling in the number of qubits in a quantum computer every nine-months.
But we are also seeing the rise of specialist chips — chips designed for a specific purpose.
And Nvidia is rather good at a particular type of chip.
And that brings me to convergence. Nvidia’s background is in video games — it has been producing graphics chips designed to soup up certain computer games for years, it was founded in 1993.
But around 2009, Nvidia made something of a breakthrough. It started using its graphics chips (GPUs) for neural networks. Now in the world of AI, neural networks are a big deal. This is the technology that makes the more cutting edge applications of AI, or machine learning if you want to use the phrase industry insiders prefer, possible.
This convergence between with video games — when Nvidia worked out how to apply its technology to machine learning and in particular neural networks – gave AI a massive boost.
And by the way, even if you disagree with me on the prognosis for Nvidia, I would add that convergence is a massively important driver of technology change. Companies that develop technology for one purpose and then find its technology can be used for something else too can enjoy extremely rapid growth. (Convergence is not the widely understood rationale for the massive valuation of Tesla stocks, for example.)
PwC has projected that AI will be contributing $15.7 trillion to the global economy a year, by 2030.
The truth is that the story of AI’s impact on the world has only just begun. We are not even in chapter one yet, more like the introduction. I dare say that when we get to chapter eleven, many AI companies will go bust, but AI will transform business and the economy this decade.
Nvidia’s technology will help make that happen.
Finally, there is ARM. I was a little sad when ARM was bought by SoftBank, meaning the London Stock Market lost the one genuinely world-class tech.
There is a question mark over whether regulators will allow Nvidia to buy ARM — although I personally think the purchase will go through.
If it does, Nvidia will enjoy time in the mainstream media’ spotlight.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees