Nvidia joins trillion-dollar club, riding on the AI boom
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On Tuesday, Nvidia Corp (NVDA.O) joined the premier league of US companies valued over a trillion dollars. As a result, investors are flocking to the chipmaker, who's quickly ascended as one of the foremost beneficiaries of the artificial intelligence (AI) boom.
The company's stock value tripled in less than eight months, reflecting a swell of interest in AI due to the fast-paced advancements in generative AI. This technology, capable of human-like conversations and crafting everything from jokes to poetry, is changing the game.
From October to today, Nvidia has seen a roughly 240% rise, outshining every broad-market S&P 500 index member. This rally has boosted Nvidia's valuation beyond its competitors, and some analysts believe the ongoing AI boom implies the stock is undervalued.
Nvidia's Rapid Rise in the AI-Driven Market
As of Tuesday, Nvidia shares were up 5.7%. The only other US companies to boast a valuation exceeding $1 trillion are Apple Inc (AAPL.O), Alphabet Inc (GOOG.O), Microsoft Corp (MSFT.O), and Amazon.com Inc (AMZN.O).
Angelo Zino, an analyst at CFRA Research, views Nvidia as "the most important company on the planet in an era that is rapidly changing towards one that greater AI capabilities will emphasize."
The recent surge extends a rally ignited by last week's revenue forecast, which outstripped the average Wall Street estimate by more than 50%. Some analysts called this leap "unfathomable" and "cosmological."
The top price target puts Nvidia's value at approximately $1.6 trillion, aligning it with Google-parent Alphabet. In addition, Nvidia's forward price-to-earnings (P/E) ratio, a standard stock valuation benchmark, is 47.49. This is considerably higher than peers Qualcomm (QCOM.O) and Intel (INTC.O) and exceeds the sector median of 18.09, according to Refinitiv data.
The AI Boom: Powering Nvidia's Unprecedented Growth
Kinngai Chan, a senior research analyst at Summit Insights Group, noted, "While the company's valuation looks lofty at the moment, we think Nvidia has the earnings firepower as the adoption of its AI GPU remains in the very early innings."
The race for AI has prompted a strategic shift among Big Tech companies, fueled by the hope that the technology will drive demand. Generative AI is powered by potent graphics processing units (GPUs), 80% of which are produced by Nvidia, analysts say.
The success of OpenAI's ChatGPT has encouraged tech giants like Alphabet and Microsoft to invest heavily in generative AI. In addition, under CEO Jensen Huang's leadership, Nvidia has pivoted to the data center market in recent years, following a longstanding reputation as a gaming chip heavyweight.
Nvidia's business saw a notable expansion during the pandemic as gaming, cloud adoption, and crypto mining using its chips soared. Huang's bet on AI will propel growth in the coming months.
Despite the lofty valuation, analysts suggest that Nvidia's AI chip business still holds potential for growth, as generative AI is in its early stages, with widespread adoption expected in the future.
Nvidia's shares rose about 25% last week, sparking a rally in AI-related stocks and buoying other chipmakers. As a result, the Philadelphia SE Semiconductor index (.SOX) closed last Friday at its highest in over a year.
Jim Kelleher, an analyst at Argus Research, stated, "Technical traders and AI mania have pushed Nvidia toward the $1 trillion cap, and it is not inexpensive."
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