Nvidia – Fear of Missing Out

Companies and nations are investing substantial funds to keep pace in the AI race, focusing on establishing their proprietary artificial intelligence infrastructure. Nvidia is currently reaping the rewards of this trend. They are a semiconductor designer specializing in high-powered chips crucial for training models in accelerated computing and generative AI applications. In addition to these chips, Nvidia provides the essential components that link them, forming supercomputers. This ranges from the switches and wiring to the requisite coding language (CUDA) necessary for running these advanced models on their chips.

Last week, Nvidia unveiled its Q4 2024 results. Their revenue surged by 126% compared to FY2023, reaching $60.1 billion for FY2024. Net profit increased by 581%, soaring to $29.7 billion. Noteworthy is the substantial improvement in the gross profit margin, escalating from 56.9% in FY2023 to an impressive 72.7% in FY2024. Nvidia, as the designer, relies on semiconductor fabrication plants, such as TSMC, for chip manufacturing. This explains the disproportionately higher growth rates in gross and net profit compared to revenue, highlighting Nvidia’s operational leverage.

Companies and countries can’t get enough of Nvidia’s chips, with demand surpassing their current supply capabilities. Nevertheless, there remains a significant concentration among chip buyers. In Q4 2024, 40% of Nvidia’s data centre revenue was attributed to the three primary cloud service providers – Alphabet, Microsoft, and Amazon. These industry giants are still in the early phases of developing accelerated computing and generative AI products. This prompts the following questions:

1. Is AI a true megatrend, or will it fade away?
2. Will companies be able to generate sufficient additional revenue or enhance productivity to justify their expenditures on AI technology, including Nvidia’s chips?
3. What are the enduring implications on society?

Nvidia’s stock price has surged by more than 230% in the past year due to their rapid capacity expansion amid growing demand. However, formidable challenges persist. Intense competition looms, with Microsoft, Amazon, and Google striving to develop their own semiconductors for data centres, aiming to reduce dependency on Nvidia. The company faces towering expectations, and even minor deviations from anticipated performance can have a significant impact on their stock price.

Nvidia, Microsoft, and Amazon are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio clients.