Nvidia: AI Reign: Too Big to Fail or a Bubble Ready to Burst?
Powering the Future of AI and Data Centres. Is the Growth Potential Unstoppable?
Business profile:
Name: Nvidia
Industry: Semiconductor & Equipment
History: Founded in 1993
Size: $3.6 Trillion
How do they make money: Nvidia drives revenue through a powerful lineup of high-performance GPUs used across data centers, gaming, automotive, and AI-driven solutions. With manufacturing led by TSMC and Samsung, Nvidia focuses on innovative design, powering growth across critical markets.
Graphics processing units (GPUs)
Application programming interfaces (APIs) for data science and high-performance computing
As well as system-on-a-chip units (SoCs) for the mobile computing and automotive market.
Nvidia is also a dominant supplier of artificial intelligence (AI) hardware and software.
Competitive position: Nvidia’s moat combines cutting-edge technology, a robust ecosystem, and strategic industry alliances, solidifying its leadership in accelerated computing and AI.
With an 80% market share, Nvidia outpaces competitors like AMD and Intel, solidifying its dominant position in GPU and AI markets. What separates Nvidia from other competitors in the GPU market is that they managed to design a chip with 3D visualization capabilities. These chips can also be utilized for not only gaming, and computers but also crypto mining and now for AI. Their edge came from betting on the future development of computers that would later become reliant on their GPU chips. A bet that’s paid off for Nvidia as they seek to become a trillion-dollar company that would overtake Apple to become the most valuable company to exist.
Unmatched GPU Performance: Industry-leading GPUs with powerful parallel processing, essential for AI and ML workloads.
AI & Data Center Focus: Dominates with 80% market share in accelerated computing, gaining rapid market share in data centers as demand for AI grows.
Comprehensive CUDA Ecosystem: A proprietary CUDA platform locks in developers with high switching costs, boosting software stickiness and ecosystem loyalty.
Hardware & Software Integration: Full-stack approach with optimized hardware-software co-design delivers superior, seamless AI solutions.
Energy-Efficient Compute Power: Top performance per watt, making Nvidia GPUs ideal for power-conscious data centers.
Strong Partnerships: Collaborations with major cloud providers and hyperscalers such as Google, Amazon, and Microsoft, ensure Nvidia’s presence in high-demand markets.
If we look at market capitalisation across Nvidia’s main competitors we find it’s got the biggest aggregate market value.
Capital allocation: Nvidia strategically allocates capital to strengthen infrastructure, boost shareholder value, and drive industry-leading returns. While the company's capital-intensive infrastructures, like the Blackwell platform, require substantial upfront investments, Nvidia creates shareholder value by strategically investing in its business, distributing returns, and effectively using its profits. These decisions are influenced by the company's specific needs, industry dynamics, and market conditions.
For comparison against its main competitors, we can see Nvidia has better capital allocation than the likes of AMD, META and Google. However, AMD has better FCF.
Is the business capital light?
Nvidia is a relatively low capital-intensive company. However, due to its significant investments into research and development, manufacturing facilities, and advancing technology infrastructure, we find that In 2023 alone it has invested $7.339 B into research, which is a staggering 39% increase from 2022. As technology evolves around AI, the internet, data, and infrastructure, the need to innovate and develop better and more powerful chips will be demanded by the market, so there could be an expectation that the need for capital might increase as the years go by.
Nvidia’s P/FCF is 58.93x, meaning investors are paying $58.93 for every $1 of earnings—quite a premium! This high valuation reflects strong investor excitement and fear of missing out (FOMO) over the AI boom. However, if the AI promise doesn’t fully materialise, it could lead to disappointment.
Discounted Cash Flow (DCF): The market has high hopes—Nvidia is projected to grow by 30% over the next five years, driven by the AI boom. For this growth to continue, Nvidia needs to stay ahead of competitors and fully leverage hyperscaler data centers. If these expectations aren’t met, investors could be disappointed, as Nvidia’s stakes are higher than ever to deliver on its promise.
We look at 3 ratios to determine the healthiness of Nvidia’s balance sheet:
We look at 3 ratios to determine the liquidity of Nvidia’s income statements:
Management: From washing dishes to running a $3.6 trillion company, Jensen Huang embodies Nvidia’s spirit of innovation and drive for perfection. Jensen Huang’s visionary leadership drives Nvidia’s focus on cutting-edge innovation and Huang still owns 3.9% of the company (value of £137 billion). He has been largely involved with the success of the organization despite his humble beginnings. So the question is, what separates him from other CEOs? It's simple, high demands and being a perfectionist. This is supported by having a flat organizational structure and having up to 40 people report directly to him. Despite having a hierarchy anyone can join any meetings and isn’t limited to ranks. He believes in not limiting information. He avoids typical hierarchical communication and puts a massive emphasis on continuous learning and staying updated with the latest trends and industries.
Performance: Nvidia's share price has outperformed both Intel and AMD, achieving an impressive 90.3% CAGR over the last four years. This year alone, Nvidia’s share price surged by an incredible 195.3%, showcasing its market dominance and strong investor confidence.
Growth prospect: The big question now is has Nvidia reached its peak? With an anticipated compounded growth of 11.6% in earnings per share over the next 8 years. Key drivers will be AI and cloud computing which should push its earnings per share from $2.84 to $5.76 per share.
If we look at the landscape of the industry, the market is constantly evolving and as technology develops the need for more powerful chips will grow. The GPU market value is expected to surpass 274 billion by 2029, representing a 33.2 % CAGR from 2024.
Currently, the GPU market is worth over $65 billion, up from $43 billion in 2023, underscoring the immense growth potential in the industry. As a result, the demand for chips is expected to continue growing. Further to this, Datacenter revenue is a core driver, growing 41% QoQ to $14.5B (80% of total revenues in Q3 FY24). As Chris Millier brilliantly put it, "In the age of AI, data is often hailed as the new oil. But the real bottleneck isn't data availability—it's processing power." This underscores why Nvidia GPUs are set to remain indispensable in the AI revolution.
Risks: Despite Nvidia currently leading the market with its exponential growth, there are some key risks associated with being a market leader;
Rising Competition: Nvidia faces stiff competition from major players like Amazon, Alphabet, and Meta, all investing heavily to expand their own AI capabilities.
Overvaluation Concerns & Trade Risks: Nvidia’s high valuation could lead to volatility, and US sanctions or tariffs, especially related to Taiwan, may disrupt its supply chain.
Revenue Dependence on Data Centers: With most revenue coming from data centers, any slowdown in AI demand could impact Nvidia's share price and growth potential.
Nvidia’s revenue is highly concentrated, with Amazon, Meta, Microsoft, and Alphabet collectively contributing 40%, highlighting a significant reliance on a few key tech giants—a potential concentration risk for the company.
SCC views: Nvidia stands at the forefront of innovation, shaping the future of AI, computing, and data solutions while tackling some of the world's most pressing challenges. As a leader in the booming data center market—expected to grow from $307.52 billion to $745.15 billion by 2030—Nvidia's dominance in this sector, which accounts for 87% of its revenue, positions it as a cornerstone of the industry's growth.
For investors seeking long-term growth and stability, Nvidia offers an attractive opportunity. Its diversified business model, bold vision, and pioneering spirit make it a compelling choice. However, with a staggering $3.6 trillion market cap, the law of large numbers looms, suggesting that future growth may be harder to achieve. Any deviation from high expectations could shake investor confidence.
Adding complexity, CEO Jensen Huang recently sold $713 million worth of shares. While insider sales can have various motivations, such actions often raise questions: does management foresee headwinds? As former Citigroup CEO Chuck Prince cautioned, “We have to keep dancing until the music stops.”
Investors should weigh Nvidia's extraordinary potential against its valuation and risks. With the right timing and perspective, Nvidia remains a dynamic force and a fascinating player in the tech investment landscape.
SCC’s view: Underweight, wait for a year or two and wait for a greater entry point.
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Risk Disclosure: This content is for informational purposes only and does not constitute investment advice. Investing carries risk, including potential loss of principal. Always consult with a professional financial advisor to evaluate your risk tolerance and financial goals before making any investment decisions.