Nvidia’s stock has been on a tear, leaving even seasoned investors scratching their heads. The company’s market cap has ballooned to astronomical heights, at a wondrous $2+ trillion. That makes it the third most powerful company in the world, only after Microsoft and Apple. Now that’s insane in a world where there are so many other better-known companies than Nvidia. Competitors like AMD and Intel are choking in the dust, and Jensen Huang is laughing all the way to the bank.
But what’s driving this meteoric rise? To understand the present, we need to delve into Nvidia’s past and unpack the key factors that have positioned it as a leader in the cutthroat computing business.
From Humble Beginnings to Gaming Dominance
Nvidia’s story began in 1993, founded by a group of three engineers with a passion for graphics – Jensen Huang, Chris Malachowsky, and Curtis Priem. Initially, the three focused on developing high-performance graphics processing units (GPUs) for the burgeoning personal computer market. GPUs were seen back then as niche components, but Nvidia recognized their potential to revolutionize how computers render visuals.
The three engineers recognized that gaming proved to be one of the most computationally challenging elements in rendering. Thus, they saw the need to develop chips specifically tailored for the gaming industry, and this is where the windfall came from. It’s first graphics accelerator, the NV1, proved to be a different product from the rest of the industry. The NV1 processed quadratic primitives, in contrast to competitors like Microsoft that stayed fixated on triangle primitives.
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Eventually, through its relentless push and focus on performance, Nvidia developed is first official Graphics Processing Unit – the GeForce 256. This featured onboard transformation and lighting, featuring advanced rendering, motion compensation, video acceleration and lighting fidelity.
Their vision proved prescient. Nvidia’s relentless focus on innovation and performance led to the development of groundbreaking GPUs that pushed the boundaries of graphical fidelity. This dedication resulted in a loyal following among gamers, particularly those seeking the smoothest gameplay and the most stunning visuals. Titles like “Crysis” and “The Witcher 3” became benchmarks for graphical prowess, all powered by Nvidia’s hardware.
The AI Inflection Point
Nvidia’s good fortunes became apparent with the rise of AI. Applications such as machine learning and deep learning involving complex parallel calculations proved unfeasible on traditional single-threaded CPUs. On the other hand, GPUs which provided parallel processing were perfect for the intense parallel computing power demanded. Traditional CPUs such as Intel and AMD were effective for general purpose computing, but their architecture wasn’t built for parallel computing.
With Nvidia’s GPUs, AI applications could handle massive amounts of data at a go. Simultaneously, they proved capable of training and running AI models. This convergence proved to be a game-changer. Nvidia’s CUDA architecture, a system for programming GPUs, became the de-facto standard for AI developers. Major tech companies, research institutions, and startups all flocked to Nvidia’s hardware. The company transformed from a niche player in gaming to a dominant force in the broader tech landscape.
To put this wild success into perspective, Nvidia valuation in 2015 was around $20 billion, while its main competitor Intel was just above $170 billion. Nine years later in 2024, Nvidia is worth around $2 trillion in market cap compared to Intel’s $200 billion. That’s just remarkable! All this is pegged on AI. These preposterous numbers may be an indicator that AI is a bubble after all, Nvidia’s prowess notwithstanding.
Will Nvidia’s Exponential Growth Last?
The perfect storm that is causing Nvidia to defy stock market realities seems far from over. AI has just exploded and is rapidly transforming industries. From self-driving cars and facial recognition to medical diagnosis and stock market prediction, the demand for AI computing power is surging. This presents massive potential for Nvidia’s GPUs.
Cloud computing providers like Amazon Web Services (AWS) and Microsoft Azure are increasingly offering AI services. These services themselves rely heavily on Nvidia’s GPUs. These further fuels demand and creates a recurring revenue stream for Nvidia.
The metaverse is yet to truly take shape. High-fidelity graphics and real-time simulations within the metaverse will require immense processing power. Nvidia’s GPUs will be right at the forefront of this potentially transformative technology. Mark Zuckerberg has estimated that this could be a $5-7 trillion industry in a few years. If it does play out, Nvidia will be on hand to reap from the massive windfall and up its valuation even further.
Future Concerns for Nvidia
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Nvidia’s future is undoubtedly bright. But that’s not to say that its competition is just sitting back waiting for Nvidia to cash out. Competitors like AMD and Intel are ramping up their AI efforts and could soon be releasing GPUs that break Nvidia’s chokehold on the industry.
Additionally, new entrants like Graphcore are vying for a share of the AI hardware market. This increased competition could put pressure on Nvidia’s margins and market share. Additionally, the growth of the AI industry could plateau in the future. More efficient and specialized hardware may emerge that require less raw processing power. Nvidia’s revenue could take a hit.
| Company | Market Cap (Trillions) | Revenue (TTM, Billions) | Gross Profit (TTM, Billions) | Revenue to Market Cap Ratio |
| Microsoft | 3.09 | 227.58 | 158.74 | 73.60 |
| Apple | 2.77 | 385.71 | 173.67 | 139.07 |
| Nvidia | 2.06 | 60.92 | 44.30 | 29.58 |
| Saudi Aramco | 2.05 | 552.13 | 283.73 | 269.34 |
| Amazon | 1.85 | 574.79 | 270.05 | 310.97 |
| Alphabet | 1.72 | 307.16 | 174.30 | 178.43 |
Table 1: Revenue to Market Cap Ratio of Global Top 6 companies
According to the table above, Nvidia whilst is sitting pretty at #3 on the table in terms of market cap, it has the lowest market cap to revenue ratio of all the top 6 companies. That means that its current stock price might be inflated due to the AI stock bubble, although it has a high annualized return. A market correction could lead to a significant drop in stock price.
Conclusion
Nvidia’s story is one of vision, innovation, adaptation, resilience, and riding the right wave. Its dominance in GPUs and strategic positioning in the AI revolution have propelled its valuation to dizzying heights. However, a critical eye is vital and the company represents a tough balancing act.
Competition, market saturation, and valuation concerns are factors to watch as Nvidia navigates the ever-changing tech landscape. Signing off!
