Stock markets in the US have recently reached new all-time highs. The S&P 500 Index is hovering above the 5,100 mark – up about 8% in 2024.
One of the biggest reasons for this has been the hype surrounding Artificial Intelligence (AI). Since OpenAI released ChatGPT in late 2022, it has become a global sensation. With the AI theme on the minds of investors, the largest technology companies in the US have seen their share prices increase substantially.
Fabless semiconductor designer Nvidia Corp (NASDAQ: NVDA) has been at the forefront of this rally in markets. After soaring 237% in 2023, Nvidia shares are now up 70% so far in 2024.
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Nvidia Chips Go Into Everything AI
The biggest reason Nvidia has been so dominant in the US rally is the company’s position in the semiconductor space, as it relates to the development of AI.
Ever since the company established itself as a leader in the design of cutting-edge chips – mainly through specialised graphics processing units (GPUs) – its dominant position has only strengthened.
Initially, its GPU chip designs were mainly used in gaming and were associated with that niche for a long time.
That started to change in the mid-2010s when it turned out that GPUs were far superior to traditional central processing units (CPUs) when it came to processing data centre workloads that were required from the explosive growth of cloud computing.
Nvidia became a big beneficiary of this shift towards GPUs and its chip designs. Today, according to estimates, the company has around 80% of the high-end AI chip market.
Among Nvidia’s largest customers are other Big Tech companies that are trying to benefit from AI, including Microsoft Corporation (NASDAQ: MSFT), Meta Holdings (NASDAQ: META), Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOG).
Source: Omdia
Nvidia’s Earnings Growth Has Translated Into Share Price Growth
Nvidia’s strong rally is supported by robust growth in sales and earnings. While the eventual winners of AI is unclear, it has become obvious that advanced semiconductors will be required to manage the computing workloads that run AI applications.
That has become evident in the numbers. Nvidia’s latest earnings release – for Q4 2023 – saw the company post sales growth of 265% year-on-year as it generated US$22.1 billion in sales.
For the whole of FY2023, Nvidia’s net income was up 500% to nearly US$30 billion. Following its latest earnings report, Nvidia’s market capitalisation has surpassed US$2 trillion.
Source: Factset, Forbes
It became only the third American company to reach that milestone (after Microsoft and Apple). Many market commentators say this is only the start of the AI revolution and that Nvidia still has room to grow from here.
One reason is that while its chip designs are sought after, the software that these chips run on are also provided by Nvidia.
Known as CUDA, this proprietary computing platform developed by Nvidia, has become a key tool for developers using AI.
Risks For Any Investment Or Company
Despite being Nvidia’s biggest customers, many of the largest cloud computing giants, like Microsoft, Apple, Google, and Amazon, are trying to develop their own AI chips in-house so that they’re not too reliant on a single provider like Nvidia.
Given Nvidia’s dominant position in the AI chip segment, it has been no surprise to see other Big Tech companies sign agreements with Nvidia’s competitors – that can also develop high-end AI chips.
For now, though, Nvidia’s leadership in the AI semiconductor space remains unchallenged.
Nvidia’s impressive share price performance recently has been mainly down to the buzz surrounding AI, the company’s leadership position in AI chips, and its strong earnings growth.
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