The Silicon Valley firm that pioneered the generative artificial intelligence boom briefly hit $2 trillion in market value for the first time on Friday, riding on insatiable demand for its chips. Its investors have bid up shares to bubble-like levels. But they could be in for a rude awakening.
Nvidia’s meteoric rise has made it the fourth U.S. company to reach the milestone after Apple (AAPL), Microsoft (MSFT), and Google parent Alphabet (GOOGL). It took less than half the time it took for them.
Investors are fueled by the burgeoning demand for “deep learning” technology, which is used in everything from facial recognition to self-driving cars. Generative A.I. models are trained by analyzing giant tomes of preexisting data, attempting billions of trials to achieve proficiency, and sucking up enormous amounts of computing power in the process. Nvidia’s chips enable these models to train faster than competing hardware and respond far more quickly to user prompts.
As a result, Nvidia is also enjoying unprecedented revenue growth. The chip designer reported a 769 percent increase in fourth-quarter profit on Thursday and a 580 percent jump in full-year profit. Its stock jumped by $277 billion, making it the biggest one-day gain on record, and pushed Nvidia past $2 trillion in intraday trading.
Analysts say that is a lot of money, but analysts say it will not be enough to fuel Nvidia’s future growth. A surge in rival hardware, such as Google’s upcoming Tensor processor, and a growing tendency for companies to design their chips will limit Nvidia’s revenue. New research breakthroughs might also radically alter the technical needs of A.I. systems, further undermining Nvidia’s popularity.
Nvidia’s meteoric rally has also been fueled by expectations of a tax cut that will reduce corporate profits and bolster the stock market. Analysts are split on whether the tax cut’s benefits will offset a slowdown in China, which currently accounts for about a fifth of Nvidia’s revenue.
If Nvidia cannot meet investors’ rising expectations for its profitability, its stock will eventually face a reckoning. That could happen as soon as 2024, when the expiration of a critical tax deduction takes effect.