Among the buzziest companies of the moment, Nvidia has been making headlines mainly due to its recent stellar share performance.
Given this price increase, investors across the board are exercising a great deal of caution where, I believe, they should instead be getting quite excited.
The investment case for Nvidia has changed markedly in the past few years. Whereas before it was a high-tech business, creating high performance processors (GPUs) for applications like gaming and other high-speed computing requirements, now Nvidia is a high-tech business creating GPUs for artificial intelligence. The product has not really changed (apart from becoming a lot more powerful), but its application is where the key to its new investability stands.
What is most important to understand about Nvidia is that it is the company that supports generative AI. Essentially, if you think AI is going to be important, or is a growing phenomenon, then you need to hold Nvidia shares. The reason for this is simple – Nvidia provides all the GPUs to the makers of generative AI software. ChatGPT, Microsoft Copilot, Google Gemini, Midjourney, Adobe Firefly, among many others, all use Nvidia’s GPUs to power their AI offerings. If you want immediate delivery from your AI query, you need Nvidia’s products.
Nvidia’s chips are still hot
The meteoric rise of Nvidia’s share price has got many potential investors in a quandary. Do they hold off waiting for a dip (that might never come), or do they take the plunge now in the hope Nvidia’s long-term outlook continues to improve. Existing investors will be wondering whether to take profits, or even sell out altogether.
While short-term dips are possible, if not likely, the long-term prospects for Nvidia, we believe, are extremely rosy.
Nvidia benefits from a number of structural tailwinds. Three years ago, data centres around the world had less than 5pc of their processing capacity in GPUs. Today, that is around 10pc. We believe this could go to 50pc or even further.
The other biggest companies in the world (Nvidia is now third biggest by market value), are all customers of Nvidia. Of great significance is the fact that the world’s largest companies, such as Microsoft and Alphabet, rely on Nvidia to drive their highest growth potential businesses, which are all AI-based – Microsoft Copilot and Google Gemini in these cases.
Nvidia’s strong competitive position is also a reason to be positive. The business is not easily disrupted. Its CUDA operating platform and application programming interface (or API) is the industry standard for creating high-performance, GPU accelerated applications, giving it an extraordinary “moat” against potential competition in the AI programming space.
Further, with a net cash balance sheet and an exceptional founder-led management team, the accounts and structure of the business make for good reading as well.
Finally, we believe the transition of Nvidia from a high-growth to “quality” business in the eyes of investors will drive share prices even higher, even if earnings growth slows. Being considered a high-growth business means there have been questions over its long-term share price sustainability. One mark of a quality business is its predictability of earnings. Once the company enters a virtuous cycle of customers upgrading their processors on a regular basis to keep up with an increase in ever-more-complex AI queries, we believe the company will gain its quality credentials.
These virtuous cycles provide the predictable earnings, which come at a premium, and nerves should be settled around its “high” share price.
For prospective investors who are worried the shares are overpriced, perhaps they will take comfort in the consensus one year forward p/e of the following companies: Microsoft is trading at 32 times earnings, Amazon 33 times, Tesla 54 times, while Nvidia is at 35 times.
The white-collared elephant in the room
Above are the pure investment cases for Nvidia. But there is a potentially even better case for investment that comes from a social perspective – we might even venture that buying shares in the company that will power AI could be the best hedge for all our jobs.
Where the industrial revolution and subsequent mechanisation displaced many blue collar jobs, it may now be the turn of the white collar workers to face job uncertainty. Tools such as Microsoft Copilot and Adobe Firefly are not only useful to drive efficiencies in the workplace, but also offer cheap access to coding and artistry (respectively) that used to demand a human touch.
It is graduate positions, in particular, which we feel will be most affected here. With university degrees already looking to outweigh graduate positions, generative AI will likely add further pressure to this imbalance. For those graduates lucky enough to get a job, they will likely need to accept a lower wage to take on a training position – all the while being mindful of their student debt.
Imbalance is an important point here. While much is made in western cultures about “gaps”, AI is likely to exacerbate this further. This is another reason why being an early investor could be the answer to your financial future. And backing quality businesses like Nvidia is we think the best route to gain access to the global structural mega trend that is AI. It remains the largest holding in the WS Blue Whale Growth Fund.
This article featured in The Telegraph
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