In June 2024, NVIDIA eclipsed Microsoft to rise to the #1 most valuable company in the world. Let’s take a brief look at the 30+ year story of NIVIDA, how it skyrocketed to preeminence amidst the latest AI wave, and where its story might go from here.
NVIDIA started in 1993 with cofounders Jensen Huang (who is still the CEO), Chris Malachowsky, and Curtis Priem, all of whom worked for the big semiconductor companies of Silicon Valley at the time. Similar to Apple and other major industry giants, NVIDIA outsourced the physical building of their chips, focusing their time on R&D + Design work instead. Thanks to landing lucrative contracts with SEGA’s Dreamcast and Microsoft’s XBox consoles, NVIDIA was able to survive a rocky start and the Dot Com bust, replacing Enron on the S&P500 in 2001 and continuing to design ever-faster GPUs.
A couple decades later, NVIDIA unlocked massive demand with its A100 and H100 chips, the best GPUs on the market for training AI models (and the massive amounts of data they consume) in the shortest amount of time. NVIDIA smashed through the $1 trillion mark up to more than a $3 trillion valuation in a little over 1 year, exceeding Microsoft’s valuation on the stock market for the first time.
With this outside valuation comes outside expectations: NVIDIA’s P/E ratio is around 80, or nearly double that of Microsoft’s P/E ratio — you’re spending $80 to buy a sliver of NVIDIA that generates $1 of value. Roughly speaking, if NVIDIA ceased growing and distributed its yearly profits to shareholders, each shareholder would be paid $1/year per $80 of stock they held (for a grand total of 1.25% interest, or less than 1/3rd of what could be earned in a risk-free savings account in 2024). With over 200% growth for the past few quarters, NVIDIA has certainly been able to transform generational demand into profit at a pace that warrants a higher P/E “growth stock” potential. After all, the other top companies are clamoring for more and more compute power from NVIDIA, limited only by supply constraints. Other key players and upstarts in the latest AI wave, including OpenAI and Anthropic, also are looking to boost their arsenals.
It’s unclear how long this demand will continue. “AI” became the hot buzzphrase again in Silicon Valley starting in 2023, but time will tell what technology is truly revolutionary. One earnings miss or market share play by a competitor won’t kill NVIDIA, but it will reduce the forward-looking valuation that investors are pricing in. Fortunately, NVIDIA is underpinned by decades of slow and steady progress that have allowed it to take many shots on goal, leading to this breakout moment in AI after previous peaks from demand in the gaming industry. As long as the AI wave lasts, and perhaps continuing into whatever the new trends will be, NVIDIA is enjoying the benefits of an old adage: during a gold rush, sell shovels.
Andrew Jabara 