Nvidia hits $1 trillion as the AI Trend takes the Spotlight

On May 30th, Nvidia briefly joined a club of U.S. Companies sporting a $1 trillion market cap on the back of the stock appreciating over 25% during the final days of May as part of the “AI boom.” While the stock has given back some of the gains and the company sits just below the $1 trillion mark, Nvidia’s rapid growth and the corresponding headlines have investors focused on artificial intelligence and the potential money to be made investing in the next benefactor of artificial intelligence.

Nvidia and AI’s links are straightforward. Nvidia is a large-scale chipmaker, specifically Nvidia manufactures a chip called the A100. The A100 is ideally suited for machine learning models that power tools like ChatGPT, Bing AI and other generative AI tools and has become the standard for AI applications. A single chip presently costs roughly $10,000 dollars and hundreds of the chips are required to train large AI models. Citigroup estimates that ChatGPT usage alone could bring Nvidia $3 to $11 billion in sales by the end of 2023 alone.

Despite this demand, Nvidia is not resting on its laurels. In September of 2022, the company started producing the H100 chip which offers up to 30 times better performance for AI workload than the A100. Considering this data and the overall excitement around artificial intelligence, it is unsurprising that Nvidia has emerged as one of the big winners within the AI trend. The challenge is not focusing on the rear-view mirror but considering what opportunities and pitfalls remain on the horizon.

Investor Deep Dive:
Generative AI

The AI Boom, as it has been coined by financial publications, in some ways resembles many technological trends (or bubbles or booms or whatever term you prefer) we have seen in the recent past. Whether it is the crypto bubble just a year ago, or the dot com bubble of the late 90s, these historical developments can be instructive as we think about investing in the AI trend in the present day. In times like this, it is easy to find prognosticators on either side of the spectrum saying that “AI is overblown and that computers can’t replace any function previously held by a person” or that “AI will redefine the entire world as we know it.” In times like this, it is important to not get drawn to the extremes and remember that it is possible to believe in the world-changing potential of AI while also remaining skeptical of companies that are touting their investment in AI.

When a new piece of technology is having an outsized impact on markets, media and daily life, it is a great time to revisit this quote from hedge fund manager George Soros. The key takeaway being that an “underlying trend that prevails in reality” is something that can be invested in.

The Gartner Hype cycle (shown below) also offers a framework to be considered when thinking about the cyclicality of some tech innovations. It appears that we are still on the early part of the curve and still have some time until we reach the peak of inflated expectations, but only time will tell. What is most pertinent to investors is what company or companies other than Nvidia can benefit from the long-term “plateau of productivity”.

One of the main hurdles of investing in AI is figuring out how to get exposure to this theme. Take Nvidia for example. Surely it benefited from the AI trend, but Nvidia is not quite a pure play exposure to the artificial intelligence space, rather just a benefactor of and a supplier to AI firms. Next consider Microsoft, while they have meaningful resources invested in AI and Bing’s AI application is impressive, Microsoft is also a huge company and AI only accounts for a small (but growing) portion of its business. So again, while investing in AI would give you some AI exposure, it would be diluted since you are also exposed to many other parts of Microsoft’s non-AI business units. There is little doubt investors are trying to identify the next Nvidia and which company will post results that are way above expectations based on the developments of Artificial Intelligence. It will not be surprising when there are new AI-focused ETFs coming to market, but it will be even less surprising when the holdings of those ETFs are littered with companies that are Artificial Intelligence adjacent. Right now within public markets, it seems that semiconductor companies and chip makers, as well as the large tech players like Alphabet, Microsoft and Meta, are the best path to gain exposure to the AI trend.

Private equity may offer the best route to be leveraged directly to Artificial Intelligence, as many of the companies that are squarely focused on AI applications are not yet publicly traded. But when allocating to private equity, in most cases, investors lose discretion to their general partner. So, rather than company selection, manager selection becomes the challenge. If they haven’t already, we would expect that many managers are working to create a slide in their deck to summarize how they will approach investing in the AI space. Perhaps, anyone who has not already deployed capital into AI-focused companies needs to play catchup and is already too late. Since there has been so much AI related activity within private equity we could see a re-opening of the IPO market. Founders and private equity partners that can show real applications of their AI technology will likely be greeted warmly by a market that is desperate for direct AI opportunities.

There will be and have been desperate companies trying to take advantage of the market’s AI swoon. For example, see below the chart of the faltering BuzzFeed. Based on the chart, take a guess when they announced that ChaptGPT would start creating quizzes and writing “listicles” for the website.

It’s hard to blame a company for trying to capitalize on the AI trend and leveraging AI within their business operations, but investors have to work hard to make sure they decipher the difference between a company executive actively finding ways AI can unlock value within their business for their shareholders benefit and bad actors trying to inflate their stock price by feigning AI integration.

The chart below details the pickup in AI mentions on earnings calls. This is yet another example of how far reaching the AI trend is. No longer are AI discussions reserved for tech companies, in the recent earnings season, companies like Kraft Heinz mentioned that the use of AI is helping the company reduce waste. It is believable that this reduction in waste would be accretive to earnings, and thus, it is possible that integrating AI would account for a material improvement in company results. But, as we covered, the reality probably lies between the view of the cynic and the perpetual optimist.

Artificial intelligence is an exciting development, but offers challenges for investors trying to invest directly in the AI trend. The early take-aways suggest that private markets are the best way to benefit from the AI trend as public markets only offer AI adjacent or diluted AI exposure. At Crystal, we believe we have sourced private equity managers that have been first movers within the Artificial Intelligence space and could see the AI trend define performance in vintages. Only time will tell, but like many bubbles and hype cycles we have seen in the past, there are opportunities for teams and managers with a track record of security selection and technological expertise.

Sources:

1. Soros: Financial Markets | Financial Times (ft.com)
2. Nvidia's A100 is the $10,000 chip powering the race for A.I. (cnbc.com)
3. The Company Behind This $10,000 Artificial Intelligence Chip Just Flashed a Buy Signal | Nasdaq
4. AI Scores as Hot Topic on Earnings Calls as Interest Deepens - Bloomberg
5. Nvidia briefly joins $1 trillion valuation club | Reuters
6. AI Frenzy That Boosted Nvidia Seen Jumpstarting IPO Market, Just Not Yet - Bloomberg