- With a market cap of $3.5 trillion, Nvidia is the world’s largest company
- Nvidia’s share price has risen 2,626% over the past 5 years, with almost all of that growth coming in the last 2 years
- Nvidia beat earnings expectations once again this week and guidance is to grow revenue again next quarter
The world’s largest company, Nvidia, released its earnings for the quarter ended October 2024 this week. Such is the size and importance of the company that it can single handedly “dictate the near-term direction of the market” according to Bank of America analysts. The options market suggests that its earnings calls have more power to move the index than Fed interest rate decisions or US inflation readings, which have been some of the key drivers of markets for the past three years. This shouldn’t come as too much surprise though given its $3.5 trillion market cap, meaning it represents approximately 7% of the S&P 500’s total market cap.
What is staggering is that just 2 years ago the firm had a market cap of $350 billion, one tenth of the size it is now. The below graph of its market cap history shows just how recent this meteoric rise has come about. I don’t want to say what goes up must come down, but when charts like this go parabolic, they don’t often stay like that.
Source: macrotrends.net
The Earnings
Back to this weeks earnings report, and Nvidia, as it always seems to do, beat expectations again, earning revenue of $35 billion in the quarter ending October 2024 versus expectations of just $33 billion, and up from the previous quarter’s $30 billion (+17%). This is almost a 100% increase from the $18 billion it made in the same quarter last year, which was a 200% increase on the same quarter the year before. This is what separates it from the internet companies of the Dotcom bubble, whose share prices too went parabolic before cratering down, it is not profitless; it has in fact a very healthy and expanding profit margin (55% as of July 2024).
Earnings this time round were boosted by its latest chip, Blackwell, which has Microsoft, Meta and Google queuing out the door. It is part of the core infrastructure in enabling those companies to build and run generative AI at twice the speed and a fraction of the cost to its predecessor chip, Hopper. In fact, Nvidia’s AI chips are so far ahead of the competition that demand is no threat; supply remains the only constraint to Nvidia’s revenue growth. Revenue guidance for the fourth quarter came broadly in line with expectations at $37.5 billion.
However, at these stratospheric valuations, ‘in-line’ is not good enough for investors, furthermore, a quarterly increase in revenue from $35 billion to $37.5 billion is just a 7% increase and reflects the company’s lowest quarterly increase in revenue since the quarter ending January 2023. The problem is the more Nvidia beats expectations, the more the market expects, and that is a vicious circle that does not end well. The other side of that problem though is, even if you believe Nvidia has to come off those lofty valuations at some point, it’s painful to miss the party whilst it’s happening. More on timing the market next week.
Bowmore portfolios
We have a small allocation to Nvidia across portfolios that stems mainly from the passive funds we hold. In Core Risk Profile 5 for example, there is a 1% exposure to Nvidia through a Tech Index fund, the MSCI World Index fund, two US ETFs along with one active growth fund. It is the portfolio’s third largest equity holding. Despite this, it is still underweight given 2.7% is neutral for this risk profile and we are quite comfortable with that for now.
