The Rise of Nvidia: Challenging Amazon's Dominance in Market Capitalization

In the ranking of the world's top 10 companies by market capitalization, the chip developer is hot on the heels of the e-commerce giant.

Nvidia Corp's shares have surged so much this year (+33.3%) that they are now threatening to surpass Amazon and become the fifth most valuable US company by market capitalization. Today, after the head-to-head battle between the e-commerce firm and the chipmaker, Nvidia's shares are up 5.6% before the market opens, adding to the week's climb of 10.5%. Unstoppable.

Having added nearly all of Tesla's market capitalization in just the last two months, Nvidia is worth $1.72 trillion, just below Amazon's $1.76 trillion at Thursday's close. Alphabet, Google's parent company, the third most valuable US company after Microsoft Corp. and Apple Inc., is not far behind, with $1.82 trillion.

Nvidia: The Fundamentals

Nvidia's extraordinary rise sets new levels of hyperbole on Wall Street, as analysts have raced against each other to repeatedly raise their profit estimates and price targets, including, in the last week, Morgan Stanley and Bank of America. Its shares have surged another 45%, or $500 billion, since the beginning of the year, bringing it close to overtaking Amazon and Alphabet, as mentioned earlier.

However, even after the latest surge, Nvidia may still be reasonably valued. With profit estimates increasing almost as fast as the stock, the shares now trade at about 30 times this year's expected earnings, still modest compared to its historical average and decidedly cheap for a company in the midst of a two-year growth spurt expected to quadruple its revenue.

The huge swings in market sentiment around Nvidia are an objective lesson on the difficulty of assessing the benefits of a potentially massive new technological market, with the risk of underestimation as great as that of overestimation.

The New Chips

The company is focusing on building a new business unit dedicated to crafting customized chips for cloud computing companies and others, including advanced artificial intelligence processors.

The dominant global provider of AI chips aims to capture a portion of the expanding market for custom AI chips and safeguard itself from the growing number of companies seeking alternatives to its products.

Nvidia's H100 and A100 chips serve as generalized and multipurpose AI processors for many of its major clients. However, tech firms have begun developing their own in-house chips for specific needs, which helps to reduce power consumption and potentially lower design costs and time.

Nvidia officials have held discussions with representatives from tech giants such as Amazon, Meta, Microsoft, Google, and OpenAI to explore the possibility of manufacturing custom chips for them. Beyond data center chips, the company has been targeting clients in telecommunications, automotive, and gaming industries.

According to estimates by Alan Weckel of research firm 650 Group, the custom data center chip market is projected to grow to $10 billion this year and double by 2025.

The broader market for custom chips was valued at approximately $30 billion in 2023, representing about 5% of annual global chip sales, according to Needham analyst Charles Shi.

In a typical arrangement, a design partner like Nvidia would offer intellectual property and technology but leave chip manufacturing, packaging, and additional steps to Taiwan Semiconductor Manufacturing (TSMC) or another contracted chipmaker.

Nvidia also plans to target the automotive and gaming markets. For instance, Nintendo's current Switch handheld console already includes a Nvidia chip, the Tegra X1. According to sources, a new version of the Switch expected this year is likely to feature a custom Nvidia design.

It is far from clear, for example, whether generative AI will be as transformative as its promoters claim.

Despite the viral success of ChatGPT, it does not seem likely to become the kind of groundbreaking consumer application capable of creating a new massive online market, like internet search or social media. And in the business world, most companies are still in the early stages of assessing whether the technology will drive productivity or open up new markets. The massive wave of investment flooding into this field - and which has boosted Nvidia's fortunes - is likely to quickly ebb if those benefits do not begin to materialize this year.