Trading Desk: NVIDIA And The Coming Boom

This was the week that the Silicon Valley stratosphere anointed a new member. Once again, there is an “N” in the high-tech hierarchy and instead of “Netflix,” the letter now stands for NVIDIA. But since we’re playing with letters, this is a stock that you can’t spell without “AI.”

NVIDIA (NVDA) management sat down in front of Wall Street a few days ago and said with perfect clarity that demand for chips that power artificial intelligence capabilities is tracking $4 billion above expectations in the current quarter. Big Data is scrambling to deploy systems that were considered experimental or even frivolous a few months ago.

And this is not a one-time flurry of server farm operators ordering what they need for cosmetic upgrades. NVDA says we’re at the start of a 10-year revolution in the way we use computers across our lives. Processors need to get fast enough to make the transition from text and numbers to images, sound and video. Capturing all that data will require a lot of storage capacity. Networks will need to stretch simply to handle all the devices.

In other words, this is the next tectonic shift in the technology landscape and the first big growth driver in the global economy since well before COVID. We’ve heard the hype about AI and other breakthroughs before, but this time a lot of companies are putting real money behind making that hype a commercial reality.

They’re investing in applications, fighting each other in the marketplace to see which approaches are strong enough to succeed. If history is any guide, most will fizzle on the road and the investment will be lost. But the companies that win the race will capture huge markets . . . as big as the computing clouds that turned Microsoft (MSFT) into something more than an operating system company or Amazon (AMZN) into a lot more than a bookstore.

In my experience, diversification is best. You want to back all the horses in the race, knowing that there will only be a few winners at best. Those winners will do so well that you’ll forget all the others that didn’t even finish. That’s just how the technology cycle works. Go back to 1980 and there were plenty of technology stocks we don’t remember today.

But we remember Apple (AAPL) and the journey has created a corporate entity worth close to $3 trillion on the right day. A commercial juggernaut. A way of life. Our way of life, or at least a big component of it. Businesses where AAPL allows competitors to thrive are simply too small to be worth its notice.

I think the ultimate winner of the AI revolution will have a similar trajectory. It might be small and insignificant today. The raw parts may already be present in other companies. Multiple geniuses will need to work hard to put the pieces together ahead of their rivals.

Think of the railroads. Think of the wealth created in that boom. And throughout the cycle, companies like NVDA will cheerily manufacture the raw parts that build the networks and power the apps.

Is this hype? NVDA’s CEO practically can’t believe the evidence of his own eyes. “Incredible” orders for advanced chips. A “dramatic” shift in data center purchasing patterns. A full $4 billion in sales coming out of nowhere . . . and this is theoretically a season where the economy is teetering on the precipice and budgets are tight.

Evidently they aren’t so tight that $4 billion can’t materialize when enough smart people read the writing on the wall. I wouldn’t necessarily buy NVDA here (53X next year’s anticipated earnings looks a little rich here so close to a $1 trillion market cap) but this is proof that the economy isn’t ready to roll over and die.

Smart people aren’t rolling over. They aren’t hoarding that $4 billion against some kind of projected near-term apocalypse. They’re putting it to work in a place where they think they’ll get healthy ROI.

And while we might not buy NVDA to capture that ROI for ourselves, there’s a whole ecosystem of little AI companies out there. Hundreds of stocks, some big and some small, some pure plays and some trying desperately to associate themselves with this approach to computing because they can’t think of any other way to attract investors.

We’ve had a great time with Palantir (PLTR) and Credo (CRDO) this week. PLTR sells AI systems. A few years ago, we would have called it Big Data. A few weeks ago, the stock was available below $8. CRDO sells advanced networking equipment. Similar story.

As money flows, there will be bubbles and busts. But what’s left behind will be a new corporate status quo . . . maybe a new industry, maybe new business processes, a new approach to work. We don’t know yet. All we know now is that money has started flowing.

Think back before the cloud created the modern MSFT and the modern AMZN. Think back to before the portable computer created AAPL. Before the search engine. Before social media. Before online shopping. Before email. Before the personal computer.

Each of these developments created trillions of dollars for shareholders. Now it’s AI’s turn to run as far as it can. And in its wake, there will be other themes, new applications, better mousetraps we don’t even know about today.

The future is coming. The future is alive and well. We aren’t trapped in a stagnant box chasing percentage points of advantage in a zero-sum economy.

We never were. All we needed was a little confirmation that some smart people still have enough faith in the future to buy as many really good computer chips as they can afford. They don’t want to get left behind.

Neither do we.