Is Nvidia’s stock market surge a bubble?

(BFM Bourse) – The company crossed the $2,000 billion mark in market capitalization this week, and saw its share price increase fivefold in just over a year. But this dizzying progression is justified by the fundamentals of society.

The stock of semiconductor specialist Nvidia has experienced a meteoric stock market trajectory over the past 15 months, becoming the fourth largest capitalization in the world, a surge that is in no way a bubble, according to the market.

Between the day before the launch of ChatGPT, November 30, 2022, which triggered the popularity of so-called generative artificial intelligence (AI), and Friday, the price of the Santa Clara (California) group’s stock increased fivefold.

On February 23, Nvidia crossed the symbolic threshold of 2,000 billion dollars in valuation, an altitude that only Microsoft, Apple and the oil company Saudi Aramco have known.

A frenetic journey, for a company which is not even among the top 150 in the world based on turnover, and barely in the top 1,000 in terms of number of employees.

An erroneous comparison with the internet bubble

On paper, this heatwave recalls the heyday of the internet bubble, which notably saw the action of the communications network giant Cisco multiply eightfold in 18 months, to the point of becoming, for a few minutes, the first capitalization of the planet, end of March 2000.

“On artificial intelligence in general, some are getting a little excited about the valuations. But for Nvidia, it is justified by the fundamentals” of the company, says Angelo Zino, CFRA analyst. “There is not the artificial side that there was in other eras in the technology sector,” he believes.

The group’s annual net profit increased more (+581% over one year) than the stock, recalls Larry Tentarelli, of the Blue Chip Daily Trend Report research firm.

For analysts at Wedbush Securities, the relevant parallel is not to be made with 1999 and the bursting of the internet bubble, but rather 1995, the period when the internet blossomed.

At the roots of the success of this thirty-year-old company, graphics processors or graphics cards, called GPUs (graphics processing units), chips with much greater computing capacity than traditional microprocessors (CPU).

“Years ahead”

Initially developed to improve the graphic quality of video games, they have proven essential for developing the large language models (LLM) which are the basis of generative AI interfaces like ChatGPT.

Nvidia’s competitors have followed suit, and several of them, notably AMD and Intel, are already marketing their own AI-oriented GPUs, while Apple, Microsoft and Amazon have also developed chips.

But Nvidia “is years ahead” of its competitors, explains Larry Tentarelli. “As it stands, I think the only risk for Nvidia is to face supply problems,” he considers.

Unlike its rivals Intel, Micron or Texas Instruments, Nvidia, like AMD, does not manufacture its own semiconductors. It uses subcontractors, mainly the Taiwanese TSMC (Taiwan Semiconductor Manufacturing Co).

A point of potential vulnerability for the green giant (the color of its logo), but Larry Tentarelli only attributes a very low probability to the scenario of a geopolitical crisis.

For the moment, argues Angelo Zino, Nvidia’s economic model, without a production site, is more of a strength than a weakness because it allows it to generate higher margins and more easily adjust its volumes according to Requirement.

Higher than Apple?

When they scan the horizon, investors see no signs of slowing demand for AI equipment, quite the contrary. “The AI ​​revolution starts with Nvidia,” assures Wedbush Securities. “The party has only just begun.”

Analysts expect, on average, a profit almost doubled again this year compared to 2023 (+88%).

“If Nvidia maintains the pace of growth predicted by the market,” anticipates Larry Tantarelli, “it is possible that, within two years, perhaps sooner, they will exceed Apple’s capitalization.” As for becoming the world’s leading valuation, the step is high, he says, “because Microsoft is also doing very good work” on AI.

(With AFP)

JM – ©2024 BFM Bourse

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