The stock market darling on everyone’s lips is Nvidia, which makes the processing chips that power everything from home computers to industrial machinery to cutting-edge artificial intelligence technology.
On Thursday, the company stunned Wall Street with results that blew the roof off analysts’ expectations, reporting $13.5bn in quarterly revenue, $2bn higher than pundits had predicted.
Its performance is being driven in particular by the AI boom, which has tripled the value of its shares this year and given it a market value of more than $1tn.
California-based Nvidia is one of just five companies to have reached that milestone – along with Apple, Amazon, Microsoft and Google’s owner, Alphabet – and the only one that isn’t a household name.
So why are its chips so hot, and what does the future hold?
Why have sales soared?
It’s the AI, stupid. The world is in the blast phase of an artificial intelligence explosion, with companies across the world and in every sector seeking to exploit the technology as much as possible. Nvidia’s chips are the engine room of most of the world’s major artificial intelligence apps, including perhaps the best-known example, ChatGPT. This is down to the firm’s relentless focus on this vanguard area of technology, rather than focusing – as some of its rivals have done – on more mundane, proven markets.
Such is the global demand that there has been a shortage of the chips too, meaning Nvidia holds huge sway over the global market and wields significant pricing power, which has helped deliver higher profit margins. China, Saudi Arabia and the United Arab Emirates are reportedly among those buying up thousands of Nvidia’s chips.
Is there more to come?
Nvidia said it expected third-quarter revenue of about $16bn, an improvement of 170% on last year.
“A new computing era has begun,” said the Nvidia chief executive, Jensen Huang.
Analysts at AJ Bell said this was “crucial to why investors are rushing to own the stock”.
AJ Bell investment director Russ Mould said: “They see this as the start of something big, with further gains to come. In this situation it is important to not get carried away and have unrealistic expectations for what a company can achieve.”
Is this all another tech bubble?
Analysts are optimistic that it is not.
“Nvidia is also getting well ahead of the competition,” said Ben Barringer, an equity analyst at Quilter Cheviot.
“AMD has a similar networking service coming soon, but Nvidia is doing it in the here and now. Likewise with artificial intelligence, there is lots of hype, but Nvidia is one of the few companies to not just be talking about it but delivering it in what it does.”
He added that “the tailwinds remain alive and present to keep pushing the stock higher”.
What could go wrong?
There are concerns about Nvidia’s ability to supply the global hunger for its chips. The firm outsources manufacturing to Taiwan Semiconductor Manufacturing Company.
Analysts estimate that demand for Nvidia’s AI chips is outstripping supply by at least 50% and that there is no imminent sign of the imbalance easing. Demand from China is particularly high, as tech companies there hurry to stockpile Nvidia’s chips, prompting the possibility that the US will soon impose export embargos.
Officials in Washington are reportedly considering imposing restrictions on the computing power that chips exported to China can have.
Investors should also be mindful of last year, when Nvidia’s shares slumped after a profit warning, a slowdown in demand for graphics card sales and a surge in unsold stock.
Underlying all of this, of course, is the state of the global economy. Regardless of how in vogue AI chips are, a significant downturn in major economies would mean less business activity, less investment and less demand for chips.
