Nvidia is key to the market, but is it worth this much?

Nvidia designs most of the advanced chips that power artificial intelligence (AI), and that has made it an earnings machine, producing astonishing profits that have buoyed the entire stock market.

- Jeff Sommer

In the last year, its shares have returned nearly 150 per cent, helping to fuel the nearly 25 per cent gain in the S&P 500 stock index. Yet starting in late August, as the bedazzling aura surrounding Nvidia ebbed, the market stumbled.

“The magic spell has broken,” New York University finance professor Aswath Damodaran said in an interview. For a year or so, he said, Nvidia could have reported virtually anything at all, “and investors and traders would have found a way to convert that into good news.”

What changed? Nvidia hasn't faltered. Its latest earnings report was awesome. Of all the companies associated with AI, Nvidia has reaped the most benefits. Giants like Meta (Facebook), Alphabet (Google), Microsoft, Amazon and Oracle are voracious buyers of its technology.

The problem seems to be that, like a child who has eaten too many extravagant sundaes, the stock market didn't find Nvidia's latest rich offering of profits to be quite as phenomenal as it had come to expect.

For investors, the crucial questions concern the future: How big will AI, the generational technological wonder, ultimately become and what will Nvidia's stake in it be? Most crucially, how much is Nvidia, perhaps the core AI stock, really worth? The answers are significant for the entire market, where AI and Nvidia rival the US presidential election and the Federal Reserve's rate-cutting plans in importance.

As a long-term, buy-and-hold index fund investor, I don't own Nvidia or any individual stocks. But to understand where the stock market and the trajectory of technology may be going, you have to understand Nvidia, so I called Professor Damodaran for help.

SECOND TO NONE

I've been underwhelmed by the AI chatbots. They don't summarise text or cite sources accurately, and are only starting to reliably do maths. But commercially available AI is improving - and I have no reservations about the prowess of Nvidia.