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Nvidia joins $1-trillion club through generative AI

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Dr Roelof Botha is economic adviser to the Optimum Investment Group.

The approach of the summer solstice in the Northern Hemisphere has been accompanied by a proverbial storm in the format of a brand new entrant in the elite club of companies valued at more than $1-trillion.

Nvidia, a 30-year-old company that manufactures semiconductors used in thousands of products including computers, appliances, gaming hardware and smartphones, became only the sixth publicly traded company to currently possess a market capitalisation of more than $1-trillion.

The other five are Apple, Microsoft, Saudi Aramco, Alphabet and Amazon.

Tesla and Meta enjoyed brief spells in this very exclusive group, but their valuations have since dropped quite substantially to levels of around $600-billion.

Artificial intelligence (AI) lies behind the recent success of Nvidia, with this term being mentioned more than 40 times in the company’s latest earnings report. After starting out by creating graphics process units (GPUs) for video games, Nvidia explored the application of these units to allow computers to learn without programmers.

This experiment turned out to be a key factor in developing generative AI, also referred to as “deep learning”.

One of the main reasons for the recent surge in Nvidia’s share price was the announcement in the earnings report of a new generation of GPUs that work at twice the speed of those previously available, which has cemented the company’s standing as a world leader in AI.

After briefly hitting a two-year low in October last year, the company’s market value has gained $650-billion, with a trebling of the share price during 2023. 

Despite the share price having become extremely expensive, the party may continue for some time to come. A survey of Wall Street stock analysts by FactSet has revealed signs of an investor craze for AI, with buy ratings of more than 80% for Nvidia and also other tech stocks such as Broadcom.

The technology behind AI has proven to be a hit among consumers, with OpenAI’s ChatGPT having secured more than 100 million users within two months of its launch in November last year.

Despite many qualitative challenges that still need to be addressed, ChatGPT now holds the record for the fastest-growing consumer application.

SA equities offer bargains

The contrast between the financial metrics of successful tech stocks in the US and old-fashioned resource and manufacturing companies in South Africa is startling, to say the least.

From the perspective of investors who do not have forever to make decent returns, the data in the table is illuminating, vividly illustrating the vast difference in the prices that are paid for shares in these companies.

The average price paid for investing in the selected US companies is 29 times higher than for the local companies. Furthermore, the average dividend yield of the South African companies is more than 11 times higher than for the US group (averages calculated via market capitalisation weighting).

It remains a sound investment principle not to have all one’s eggs in one basket and to apply such diversification both to asset classes and to different geographical regions. At present, however, it is fairly obvious that several blue-chip equities in South Africa offer very attractive returns, both in terms of revenues flowing from dividends and the potential for capital gains. DM

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