The NVIDIA Economy
AI and Microchips Have Made it the Most Important Company in the World (sorry Apple)
The meteoric rise of NVIDIA over the past five years has been nothing short of historic. Five years ago, it was largely a company that made monitor software and graphics cards. Then the pandemic happened, the rise of bitcoin mining and an incredibly large shortage of those very video cards. NVIDIA turned that shortage into a premier position to capitalize and is now in another position to capitalize as it very quickly becomes the largest company on earth. It now has a market cap over $3 trillion which puts it in a category only with Microsoft and Apple. Fortune Magazine called it “The Most Important Stock in the World” on Wednesday. The stock’s rise has turned many of its employees into millionaires overnight. The economist likened the recent NVIDIA stock rise to a stampede of AI Bulls. With a net worth of $119 billion NVIDIA CEO Jensen Huang has now become the richest person in the world.
The recent spike in stock demand has been fueled by the AI boom. Beginning in late 2022 when OpenAI released ChatGPT and let the AI genie out of the bottle, investors immediately rallied around NVIDIA as a company that was perfectly positioned to profit. AI requires a substantial amount of memory and power, and it’s microchips and video cards are the most suitable and efficient on the market. As people began investing throughout the tech sector betting big on AI, all roads led to NVIDIA. It launched a stock buying binge that saw its $40 share price before the pandemic spiral upwards of $1200, only to be brought down by the 10:1 stock split earlier this year.
As Wall Street continued to amp up expectations and out of the realm of possibility earnings estimates, every quarter NVIDIA surpassed those by huge margins fueling the binge further.
In that respect, this has become the NVIDIA economy. Want further proof? On Wednesday stocks in the tech sector were largely stagnant, with little trading being done, everyone waiting anxiously for NVIDIA’s earnings report that came out after the closing bell. CEO Jensen Huang, the marketing savvy BMISC (Big Man in Silicon Valley) at the moment had a live webinar and showcase to announce the results scheduled. Until then, everything was in a holding pattern until investors could figure out how much companies could further invest in AI. NVIDIA has become the bellweather, the canary in the coal mine, as to the direction AI is going and will continue to grow for investment. Earlier this week Apple announced that it will be releasing iPhone 16 with AI enhancements in September and it barely registered a blip. NVIDIA announces blueprint for the next round of AI and discusses their new “Blackwell” chip that will revolutionize AI and the world takes notice in a major way.
And what happened on the earnings call?
It blew past Wall Street projections AGAIN. It made over $1 billion more in revenue last quarter than projected, increased its earnings per share by about a nickel from last quarter and up to $0.68 from $0.27 a share only a year ago. It also approved another $50 billion in stock buybacks which will only make it get even bigger in market cap.
That didn’t stop the stock from dropping after hours. Two hours after announcing record profits, the stock slid $8 a share as pessimists and short sellers tried to capitalize that the numbers “were lackluster to expectations” (news flash: they weren’t). Investors betting heavily against the stock were thrilled their put options were now in the black, but the stock is still expected to go up to $135-$140 over the next week or two on the recent news. Couple that with the fact OpenAI just announced a third round of capital funding and a valuation of $100 billion (if anything, that price is too low), and there will be no lack of market for high functioning microchips and AI hardware anytime soon.
It’s NVIDIA’s world now, we’re all just living in it.
PurpleAmerica’s Cultural Corner
To many people out there, the NVIDIA stock has all the makings of a stock bubble. Even many investors will say this. However, what makes this slightly different is that NVIDIA has continued to innovate and deliver, and its growth potential unlike many other companies right now are unlimited. Still, it’s always fun to reflect on previous bubbles and remind ourselves of the intrinsic value of…well, value.
The Dutch Tulip Bubble of the 17th century is largely cited as one of the first well documented bubbles and crashes. The period between 1634 an 1637 saw the price of tulip bulbs skyrocket to unprecedented levels, driven by the growing popularity of the flowers among the wealthy. Tulips became a status symbol and as demand soared, so did prices. At the peak of the mania, a single tulip bulb cost more than a house in Amsterdam. Speculators entered the market hoping to trade on the rise and futures contracts, only adding fuel to the price. In February 1637, the bubble burst when people stopped paying the exhorbitant costs and the price plummeted. The Dutch economy collapsed and was in a malaise for a decade after.
Much of the speculative mania that drove the 1920s economy came to a head late in the decade when early in 1929, the market started experiencing jitters. New president Herbert Hoover relied on private investment and relationships to help stabilize the market and control the damage. In October, the dam broke and as investors realized their accounts were at risk, began withdrawing as much money from the banking system as possible. This sparked a national “run on the bank” type moment all but eliminating credit and putting most people and banks into foreclosure, setting off the Great Depression.
The “Dot Com” bubble of the late 1990s/early 2000s arose with the advent of the Internet. Fueled by content providers and budding entrepreneurs, investors poured money into anything resembling an Internet based company, much in the same way people bought into “blockchain” based companies a few years back. Much of the rise in value was based on investor sentiment, not on actual results. Many entrepreneurs basically paid employees and investors with an ever expanding volume of company stocks and options, which were nothing more than empty promises and rhetoric. When companies started going belly up, the victims of not really producing much of anything, investors tightened the purse strings and crashed the economy of “irrational exhuberance.” The more stable and profitable tech companies, such as Amazon and Google not only survived, but flourished in this environment without as much competition.
After a decade long period of low interest rates, easy credit and speculation in the housing market, home prices rose substantially in the 2000s. Mortgage backed securities not representative of their true value and subprime lending practices further increased the volatility in housing. So long as the value of prices continued to rise, people could refinance against the equity they had accumulated. However, once the prices began to decline, like a series of dominoes, the market collapsed, then banks collapsed and for a period it looked like the global economy would collapse. The Global “Great Recession” would last well into the next decade.
PurpleAmerica’s Obscure Fact of the Day
Of the stocks the last 20 years that have seen an increase in stock price of 1000% in a 5 year span, the only one that is not a tech company is Monster Beverage.
Never underestimate the power of caffeine.
PurpleAmerica’s Final Word on the Subject
“The stock market is the casino and fastest way to lose money for the impatient.”
-Warren Buffet