One of the world’s most successful investors in technology said that chipmaker Nvidia may be worth more than $50tn over the next decade. This is greater than the current market value for the entire S&P 500.
James Anderson is best known for early bets made on companies like Tesla and Amazon. He said that the potential market cap of Nvidia could reach double-digit trillions. This is not a prediction, but rather a possible outcome if Nvidia maintains its lead and artificial intelligence benefits customers.
Nvidia is the main beneficiary of the boom in demand for powerful AI models that are able to train and run, such as OpenAI’s ChatGPT.
The chipmaker’s value has risen by 20 times since August 2018, when Apple became first to reach a trillion dollar valuation.
Nvidia’s chief executive Jensen Huang declared that the company was at the heart of a “new industrial revolution”. In June, Nvidia briefly overtook Apple and Microsoft to become the most valuable publicly traded company in the world.
The company’s “persistent, exponential progress, competitive advantages in software and hardware, and culture and leadership” are what Anderson is looking for. Last year, he teamed up last with the holding company owned by the Italian Agnelli family, to launch Lingotto Investment Management. He runs a $650mn investment fund, whose biggest position is that of the US chipmaker.
Anderson’s most notable work is his almost 40 years at Baillie Gifford. He ran the Scottish Mortgage Investment Trust (SMIT), which bought Nvidia for the first time in 2016 and helped transform Edinburgh’s private partnership into a star in tech investing.
Scottish Mortgage took a position in Nvidia. “We didn’t know what the main drivers would be — gaming, crypto, autonomous-driving or AI, but we left it up to the events”, Anderson said.
He said that the biggest difference between his semiconductor company and other successful bets was that “Amazon and Tesla etc. didn’t begin from highly profitable positions and dominant positions, but had to reach there”.
Hendrik Besembinder’s research, which found that only 4 percent of stocks over the past several decades accounted for the entire net wealth creation, was a major influence on Anderson and Baillie-Gifford. This led to their belief that managers should look for companies that have extreme success.
Anderson explained why Nvidia fits into this category this year in a letter sent to investors.
He stated that the real growth of data centre AI chip demands appeared to be around 60 percent per year. He said that if data centre revenues grew by 60 percent in 10 years, with margins unchanged, this would translate to earnings of $1350 per share, and a free cash flow of $1,000 per share. If we assume a 5% free cash flow, a Nvidia share could be worth $20,000 within 10 years. This would translate to a market cap of $49tn. Anderson estimated that the likelihood of such an outcome is between 10-15%.
The combined market capitalisation for all companies in the S&P500 is approximately $47tn.
Anderson said that the most important thing to him was the length of time it took for GPUs to be used in AI, and not only AI, from the initial excitement to the eventual pauses to the transformation of industries.
He said that the path would be volatile, and he wouldn’t be surprised if Nvidia experienced one or more drawdowns between 35-40% — “that’s how it works and I hope that we’d purchase more in this event”.
Nvidia is currently trading at more than 47x its estimated earnings per shares for the next year. It accounts for nearly 30 percent of the 17.7 percent gain in the S&P 500 this year.
Fund managers who don’t hold Nvidia or the other “megacap” tech stocks have faced challenges. Terry Smith’s fund, for example, lagged behind the benchmark index in the first six months of the year when it chose .
Anderson responded to the question about whether generative artificial intelligence has been hyped. “The narrow generative AI that is used for basic and consumer tasks might be overblown. But we see the real issue as whether or not it can solve serious issues in 10 years”, such as autonomous driving, robots, and drug discovery. In that sense, it is the opposite of hype. . . Nvidia quietly, but firmly, leads in supporting and providing these areas.”
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