Nvidia: Is it too late to buy the 'most important stock on Earth'?

Billionaire Jenson Huang's company controls 80% of the AI chip market but investors should be looking to identify undervalued shares that have been overlooked, experts say

A Nvidia graphic processing unit. The company's market cap has surged to $1.97 trillion on growing demand for its microchips. AFP
Powered by automated translation

Right now, there are two types of investors. Those who bought shares in US microchip maker Nvidia before they rocketed, and those who did not. No prizes for guessing which ones are happier.

Today, both face a tough choice. Should they bank the profits they have just made from Nvidia or chase the ones they missed out on?

It is always the same when a stock heads to the stars. Those two basic investor emotions, fear and greed, fly even higher.

With huge potential gains and losses on the table, even doing nothing is a decision. So what should investors do about Nvidia?

Last Thursday, the California-based company, whose high-powered graphics processing chips are driving the artificial intelligence revolution, went from stellar to stratospheric.

It posted a 265 per cent increase in quarterly revenue to more than $22.1 billion, while full-year revenue more than doubled to $60.9 billion.

This smashed expectations and the stock jumped 16.4 per cent in a day, adding $277 billion to its market value. That is the biggest one-day increase in the value of any company in history. At the close of trade on Tuesday, Nvidia stock was down slightly at $787.01.

Chief executive Jensen Huang, the Taiwan-born technology entrepreneur who founded the company in 1993, saw his net worth leap by $9.6 billion in a day to $69.2 billion.

On Tuesday, he was ranked the 20th-richest person in the world with a net worth of $69.7 billion, according to Bloomberg's Billionaire Index, and reckons the world is at an AI “tipping point” as demand for Nvidia's microchips is “surging worldwide”.

At the time of writing, Nvidia has a market cap of $1.97 trillion. Only Microsoft and Apple are bigger at $3.05 trillion and $2.82 trillion, respectively.

How long can this go on?

Nvidia stock went ballistic in 2023, rocketing by 239 per cent. Investors who decided they had missed the party made a bad call. The stock is up another 63.63 per cent in the year to date.

The buy case remains strong. Nvidia currently controls more than 80 per cent of the AI chip market, giving it a dominant market position.

Goldman Sachs has called it “the most important stock on planet Earth”, given how it has been driving equity gains over the past year.

Investors needed this kind of excitement, says Joshua Mahony, chief market analyst at Scope Markets. “Nvidia’s continued push into record highs has brought much-needed relief at a time of tight monetary policy and global inflationary pressures.”

Kyle Rodda, senior market analyst at Capital.com, says Wall Street, Japan and some European markets have been hitting record highs “despite immense doubt about the fundamental strength of the global economy and path forward for interest rates”.

He is on the side of the bulls. “While scepticism is justified and healthy, new records in any market can only be interpreted as very bullish. At least until something emerges to prove otherwise.”

With great power, comes great expectations. George Sweeney, investing expert at Finder.com, warns investors are becoming harder to impress and predicts “plenty of volatility around Nvidia’s share price in the coming days”.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, is also wary. “While a lot of the excitement might be justified, we are entering the realms of frothiness, which increases risk,” she says.

Spring is in the air as inflation retreats but Ms Lund-Yates warns: “Those banking on swift interest rate cuts are likely to be disappointed.”

Sandeep Rao, senior researcher at Leverage Shares, is also cautious. “Despite strong near-term prospects, Nvidia's stock appears vulnerable to a significant correction due to inflated valuations, unsustainable growth trends and broader market sentiment.”

It is also overly dependent on others. “Unlike fully integrated chipmakers, Nvidia relies on the Taiwan Semiconductor Manufacturing Company for manufacturing, reducing its control over costs and future innovations,” Mr Rao adds.

Nvidia is not the only US tech stock flying high right now, says Chris Beauchamp, chief market analyst at IG Group. “Microsoft, Amazon and Meta are also showcasing their robust financial health and ability to adapt and thrive in changing market conditions.”

Microsoft and Amazon have reaped the benefits of strong sales and cloud services growth, while Meta has been buoyed by its shift towards virtual reality and other future technology, he adds.

By contrast, Alphabet, the parent company of Google, has struggled due to concerns over advertising revenue and increased regulatory scrutiny. “More notably, Tesla and Apple, two investor favourites for much of the last decade, have become the largest drags on the index,” Mr Beauchamp says.

Investors are losing faith after Apple's weaker sales in China and Tesla's warning about slowing growth raise red flags, he adds.

The Magnificent Seven have driven 80 per cent of US stock market gains, but Mr Beauchamp says their grip may loosen as investors become more selective, seeking out companies that can demonstrate “real value and sustainable growth”.

Instead of chasing momentum, investors should be looking to identify undervalued stocks that have been overlooked “in a market driven by the allure of AI and tech potential”, he says.

Watch: AI is the star of the show at CES 2024

AI is the star of the show at CES 2024

AI is the star of the show at CES 2024

Those who are still keen to share in that allure but are wary of Nvidia could sample other technology stocks, such as Nasdaq-listed semiconductor specialist Advanced Micro Devices.

Its shares are up 125 per cent over the past year, which is relatively modest by Nvidia’s standards.

Other options include semiconductor specialist Marvell Technology, which focuses on networking and storage solutions, and is up 52 per cent in 12 months.

Smartphone processor maker Qualcomm has gained only 25 per cent over the past year while the Taiwan Semiconductor Manufacturing Company is up a modest 33 per cent and looks relatively cheap trading at 21.55 times earnings.

Markets are vulnerable to a short-term pullback after recent excitement but investors should not be too concerned, says Mathieu Racheter, head of equity strategy research at Julius Baer.

“We would use any weakness as an opportunity to increase exposure, as the secular bull market remains firmly intact.”

He says quality growth stocks are “reasonably valued and highly cash generative”, and while investors may want “to rotate into more cyclical sectors and regions” they should wait until later in the year.

Nobody knows where the Nvidia share price will go next. But if the AI hype is only halfway true, it could climb higher still.

Just do not expect it grow another 200 per cent from here. That would lift its market cap to almost $6 trillion, twice the value of Microsoft.

Sometimes, investors simply have to accept that they missed the moment. If it helps, most of us have.

Updated: March 13, 2024, 8:43 AM