Nvidia has surpassed expectations by achieving sales of approximately $26 billion, placing it as the second most valuable company, only behind Microsoft. According to the quarterly results presented on May 22, the company once again exceeded consensus estimates, with sales of $26 billion compared to a forecast of $24 billion. What is behind its success?
Firstly, the company, which specializes in manufacturing microchips used to train and operate artificial intelligence models, has become “the engine of artificial intelligence,” according to David Rainville, Luca Fasan, and Marie Vallaeys, managers at Sycomore AM, part of the Generali Investments ecosystem. These managers believe that Nvidia’s share in the AI microchip market will remain above 80% for several years, thanks to the company’s technological leadership over its rivals and the high entry barriers in the sector. “In the future, the company’s strong growth will inevitably extend to the supply chain. Therefore, we are convinced that companies supplying components or services to AI graphics processing units will also benefit,” they add.
The management team of Edmond de Rothschild AM’s Big Data fund agrees with this view: “Nvidia is the absolute number one with a market share of over 80% in generative AI accelerator hardware.” Nvidia is not only one of the “7 Magnificent,” but it could also be considered their leader. “Microsoft, Amazon, Meta, and Google are trying to develop the application of large language models (LLMs) and a new monetization combined with their existing business model primarily based on software and the cloud. The last group, Apple and Tesla, both have specific use cases for GenAI but struggle to deliver to the end customer in consumer electronics and automotive applications in the short term. All these companies and those necessary to maintain the development of their products should continue the upward momentum of their assets. In fact, the supplier companies configure what we call the Horde,” they add, aiming to contextualize the current tech sector.
“The company’s GPUs (graphics processing units) are the best-in-class products, capable of handling the complex calculations required by the large language models driving generative AI applications,” adds Alex Tedder, head of global equities at Schroders.
For Sam North, market analyst at eToro, another factor in Nvidia’s success is the stock split. North explains that Nvidia will carry out this stock split to make them more accessible to a broader range of investors. “The company’s stock price has risen considerably in recent years, making it difficult for some investors to buy whole shares. With the 10:1 split, Nvidia hopes to attract more investors and increase the liquidity of its shares. Although, in Nvidia’s case, there are both risks and benefits. On the one hand, the stock split could help attract new investors and increase share liquidity. There are no guarantees that the stock price will regain its pre-split level, and it could be interpreted as a sign that the company is struggling to maintain its stock price,” reasons the eToro analyst, who believes this is not the case.
In Nvidia’s Shadow
The expectations for the company are very high. In Tedder’s opinion, “after an extraordinary acceleration, revenues are expected to double year-on-year in 2023. However, the sustainability of the company’s growth profile is uncertain. In the short term, an overcapacity scenario is entirely plausible, especially since key customers, such as hyperscaler providers, have been volatile spenders in the past.”
Experts believe Nvidia’s success is likely to be long-lasting, not fleeting, and the company’s economic forecasts are quite positive. This optimistic view is dragging many companies in its wake, at least according to the management team of Edmond de Rothschild AM’s Big Data fund: “From subcomponent suppliers to power grid upgrades. Nearly $7 trillion in market capitalization is moving in tandem with Nvidia, now showing a correlation above 0.5. Among these companies are Marvell, AMD, Applied Materials, and also companies like VAT Group in Switzerland, ASML in the Netherlands, and Vertiv and Eaton, industrial companies with exposure to data center cooling and power grid modernization. These companies have recorded average gains of 25% in 2024 and 60% in the past year (compared to the market’s 22% and 7%, respectively) since generative AI gained significant stock market traction.”
