Maybe the best way to describe Nvidia NVDA 1.75% founder and CEO Jensen Huang is that he has a passion for developing superior semiconductor chips where there is no competition, like the 3D graphics chips Nvidia has made for video games for decades, as well as graphic chips for computers, tablets and smartphones.
Nvidia is now most famous for chips that write their own code, led by its new Blackwell chip that cost more than $2 billion to develop. Huang says Nvidia will introduce a new generation AI chip every year until the end of this decade, when quantum computing is expected to be the next giant leap to speed up computer processing. Anticipating this shift, Nvidia has launched a quantum simulation platform for cloud providers.
Essentially, Huang is like a chess grandmaster who can foresee moves before other highly rated chess players. In that sense, Huang is several moves ahead of Nvidia’s competitors. It is also important to have a brilliant engineer like Huang leading Nvidia and its engineering teams. In contrast, when Intel INTC -0.03% appointed non-engineer Paul Otellini as CEO, between 2005 through 2013, the company lost both its “mojo” and market share after dominating the PC business. The bottom line is that seasoned engineers like Huang can better foresee the chip industry’s future and develop exciting processors before Nvidia’s rivals do.
The recent news that the U.S. Justice Department and U.S. Federal Trade Commission have struck a deal over how to proceed with antitrust investigations into Nvidia, Microsoft and OpenAI are not likely to derail the AI revolution and may not amount to much.
An antitrust investigation can put downward pressure on the price of a stock, but it is no match for Wall Street’s love of a monopoly. Nvidia is commanding a monopoly premium of 34 times forecasted earnings.
For Nvidia’s current quarter, the analyst community expects strong sales growth of $28.38 billion and 134.4% annual earnings growth. In the past two months, analysts have revised their consensus earnings estimate 17.2% higher. Typically, positive analyst earnings revisions precede future earnings surprises. Nvidia has exceeded analysts’ consensus estimate of 9.5% to 29.2% in the past four quarters, so another earnings surprise is likely.
I should note that these earnings surprises are fundamentally additive as they ease a price-earnings ratio priced for perfection. But far more consequential is the decrease in risk this confers on Nvidia shares. Specifically, the analyst revisions and earnings beats increase trading volume, which in turn tends to reduce the standard deviation of the shares. Moreover, looking at the decrease in standard deviation in relation to Nvidia’s alpha improves the company’s risk-adjusted return outlook. We’ve seen plenty of stocks rise to meteoric heights, but few with the technical bona fides of Nvidia.
Furthermore, Nvidia is notorious for guiding the analyst community higher after posting its sales and earnings surprises. So if you are wondering how Nvidia will break through the $4 trillion capitalization level and then power on to become the first company to hit $5 trillion in market capitalization, all the stock has to do is merely follow its earnings growth and continue to guide higher.
Like a rocket, as Nvidia climbs in altitude, it will face less resistance and continue to power through $4 trillion, $5 trillion and beyond. With the technical setup in the stock, not only will Nvidia be a $4 trillion and ultimately $5 trillion stock, but this valuation will have staying power.
The simple fact is that since Nvidia spends billions of dollars to develop its next-generation generative-AI chips, competing with Nvidia has become increasingly futile. In fact, all the other AI chips under development are increasingly low-tech solutions, and not the deep learning, generative AI chips Nvidia makes. As a result, Nvidia is leading the entire U.S. stock market and the “Magnificent Seven” gathering is now a party of one.
Louis Navellier is founder, chairman, chief investment officer and chief compliance officer at money management firm Navellier & Associates. The firm owns shares of Nvidia in managed accounts. Navellier and his family own Nvidia shares via a Navellier-managed account and in a personal account.
