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January 31, 2024

Why Nvidia could pass Apple as the world's most valuable company


Glenn Freeman

The stratospheric growth of chipmaker Nvidia could see it outstrip Apple, says Munro Partners’ Nick Griffin.

Apple (NASDAQ: AAPL) is the world’s largest company, with a market cap of just under US$3 trillion. But this lead is being eroded by another company that has become a byword for artificial intelligence, Nvidia Corp (NYSE: NVDA).

The 12-month share price growth for the California, US-based chipmaker is impressive – 230% in calendar 2023 – but is simply astounding over five years. Nvidia Corp’s share price is up more than 1600% since the start of 2019.

If this growth rate continues, and everything else remains equal, Nvidia’s market cap will overtake Apple by 2026, technology analyst Beth Kindig wrote in Forbes recently.

Nick Griffin, CIO of Australian asset manager Munro Partners, holds a similar view, which he wrote about in a recent investor update.

"Apple became the biggest company in the world, helped by the launch of the iPhone. Now, if we see a 10-times growth in demand for semiconductors, we think Nvidia will potentially one day become the biggest company in the world," he said.

This bullish view explains why Nvidia is the largest position in the Munro Global Growth Fund. This is equal with the fund’s allocation to Amazon (NASDAQ: AMZN), with Microsoft (NYSE: MSFT), Visa (NASDAQ: V) and Alphabet (NASDAQ: GOOGL) rounding out the top five holdings.

What does Nvidia do?

Nvidia is a mature company that has been publicly listed since 1999. So, it’s stock is held by many Australian investors, either directly, through an exchange-traded fund such as the Global X Semiconductor ETF (ASX: SEMI) or Betashares Nasdaq 100 (ASX: NDQ), or a managed fund. But what does the firm do?

Nvidia was originally known as a gaming company, its roots lying in the manufacture of graphics processing units (GPUs) for video games. This laid the groundwork for the company to reach a massive global audience and to fund the research and development it required to expand.

Nvidia has faced numerous challenges since it was founded in 1993, including from incumbent Microsoft (NASDAQ: MSFT). But the launch of its RIVA GPU in 1997, followed by the GeForce unit in 1999, was transformational for the company.

Since then, Nvidia’s technology has become increasingly leveraged to artificial intelligence. Though AI has only become widely known within the mainstream market in the last couple of years, it has been around far longer. The highly specialised, expensive equipment previously required to run AI meant it was used primarily by large, wealthy organisations such as Google and Microsoft.

The rise of generative AI was the gamechanger, bringing the technology within reach of a mass audience – which has seen it rolled out in algorithms known as ChatGPT and DALL-E.

Global X investment analyst Justin Lin wrote about Nvidia in a recent Livewire article, describing how the chipmaker founds itself in prime position with the rise of generative AI.

“It benefitted from your classic network effects and switching costs, as programmers worldwide were deeply ingrained in its CUDA (Compute Unified Device Architecture) software.

“GPUs fine-tuned for AI workloads already existed within Nvidia’s hardware line-up, meaning extra development was mostly unnecessary.”

This technology is becoming increasingly necessary for companies competing in the technology space.

“Businesses will need all of their data to run on the cloud, and then the cloud providers are going to increase capital spending to support these AI products, and a large chunk of that capital spending is going to end up with Nvidia, which handles the AI processing,” said Munro’s Griffin.

What are the risks for Nvidia?

Of course, the road ahead contains several obstacles. Global X’s Lin says the company’s share price is “not cheap” but believes there is no bubble.

“While Nvidia has certainly had an impressive run over the past 12 months, we believe valuation for the stock remains realistic and is rooted in fundamentals,” Lin said.

He noted that Nvidia’s future success hinges on demand – as with any hardware company. “Should Google, Facebook, Amazon pull back from developing large language models or AI capabilities, future chip demand could slow,” Lin said.

And other firms operating in the AI space are making moves of their own. Amazon, Google, and Microsoft are all developing custom silicon as an attempt to “detach from Nvidia’s datacentre GPU monopoly.”

“We see this as a low-risk development in the near term, as Nvidia maintains a significant technological moat over competitors, but it’s meaningful in the mid to long-term as custom hardware will eventually form tangible economic and performance advantages,” Lin said.

The AI theme is bigger than one company

For Griffin and the Munro fund, he’s also backing other firms leveraged to the AI theme. He believes the whole semiconductor supply chain will continue to benefit from the growing use of AI.

Some other companies Munro holds are:

  • ASML (NASDAQ: ASML), which manufactures “the world’s most advanced computer chips” and is Europe’s largest technology company.
  • Taiwan Semiconductor Manufacturing (TSMC), the world’s largest manufacturer of computer chips.

“We think software companies are also the biggest winners here. Microsoft is selling their CoPilot product at roughly an additional US$30 per user, which is effectively a huge revenue opportunity for this company,” Griffin said.

What happens next?

There are other challenges for AI, including concerns about the societal impact of the technology. Governments and organisations are still grappling with how to implement AI within their decision-making and their public and consumer-facing activities.

But there's little doubt the technology will continue to find new applications, including large industries and sectors including healthcare and energy.

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