Nvidia: Three reasons why we are not selling

Nvidia has been in the World Stars portfolio for over 18 months and it has now become our largest position following its 215% rise year-to-date.  The strength in the share price has been driven by rapidly growing demand for Nvidia’s high performance GPUs (graphics processing units) in datacentres. This business delivered revenues of USD 10.3 billion in Nvidia’s recent second quarter results, growing 141% sequentially and drove total group revenues to USD 13.5 billion.

Data centres are changing to an accelerated compute infrastructure. This involves using specialised hardware (Nvidia) to perform separate tasks which dramatically speeds up the processing speed. The key applications of accelerated compute so far are Generative Artificial Intelligence (GenAI) and Large Language Models. The scale of the growth is such that Nvidia is now guiding to USD 16 billion of revenues in the next quarter, a revenue trajectory that is far steeper than anyone had predicted at the start of the year.  

In recent months we have been asked whether Nvidia’s valuation is too high or market expectations are unrealistic and have gotten ahead of themselves.  Our investment case on Nvidia focuses on three key areas: its competitive position, its addressable market and its valuation. As we outline below, Nvidia continues to be exceedingly well positioned across all three. We believe that the company has the potential for significant upside in the coming years and have decided to keep it as a core position in our portfolio.

Competitive advantage

We have previously written that Nvidia has a structural competitive advantage with its technology that is ideally suited for GenAI workloads.  This has become even more apparent this year, as large customers including Microsoft, Meta and Alphabet are all using the Nvidia product suite.  These are the largest and most sophisticated companies in the world, they generate more cash than any other and they are choosing to spend billions of dollars on Nvidia’s products.  If they had the ability to build their own products in this space they would have already done so. Custom ASICs (application-specific integrated circuits) will be used to perform some functions but will not be capable to replace the entire Nvidia product suite.

Nvidia has strong relationships many large companies like these, including Tesla, whose CEO Elon Musk said on a recent earnings call: “We’ll take Nvidia hardware as fast as they will deliver it to us … tremendous respect for Jensen and Nvidia.” 

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