Dominates Global Markets, But Can It Maintain Its Momentum?

If Wall Street had a hero this year, it wouldn’t be the Fed or inflation, rather it would be Nvidia. The chipmaker has emerged as the stock market’s champion, diving in to propel indexes, rewrite records on valuations, and steal the limelight with its AI-driven narrative. 

Indeed, Nvidia hasn’t just outperformed its peers, instead it has outperformed the entire stock markets. Forget the FTSE, CAC, or DAX, as Nvidia is worth all of them combined. It seems like it’s almost not even a tech company anymore, but rather an economic wonder with a stock symbol.

Last week, Wall Street and international investors had all eyes on one ticker symbol, which is Nvidia, and they had a very good reason for that. It is quite understood at this stage that the company not only rode the wave of AI, rather it created it.

 As Bloomberg’s Cameron Crise noted,

“Nvidia has singlehandedly accounted for more than 1/6 of the rally in the SPX off of its April low, and in so doing has posted the highest four-month Sharpe ratio in the company’s history.”

Fewer stocks throughout history have endured this kind of massive weight and impact on the larger market and fewer still have been able to sustain the momentum like Nvidia.

Milestones that Amaze the Market

The magnitude of Nvidia’s climb is hard to bring into context. In the last year alone, the market capitalization of the company has not only outshined individual global indexes such as the UK’s FTSE, France’s CAC, and Germany’s DAX, it has surpassed the combined total of all three. 

In another mind-boggling comparison, Nvidia now represents more value than the whole S&P 500 energy sector, whose members ironically provide the very energy to power Nvidia’s AI-driven chips.

According to John Authers, the rise of the chipmaker has produced “Ncredible” milestones that even long-time investors find shocking. He said,

“Over the last year Nvidia’s market cap has overtaken the total valuations of the main stock indexes in the UK, France and Germany. It’s also overtaken the entire S&P 500 energy sector to whose members will fall the task of powering the machines that use its chips”.

Demand for Power

Still, even giants encounter hurdles. It seems like Nvidia is set to run into something that is much less flexible than share prices, which is America’s crumbling power grid. 

The Economist said,

“Fittingly for an unstoppable force, Nvidia is about to come up against an immovable object. Or at least an object that has not moved much in decades—America’s power grid.”

AI chips are energy hogs, and the infrastructure needed to provide all that energy has not shifted much in decades. This upcoming challenge is one which the usual valuation doesn’t appear to account for. 

The discrepancy between huge expansion in AI computing and slow upgrades in energy infrastructure might turn out to be a blockage that may lessen Nvidia’s otherwise spectacular ascent.

A Gamble on the Future

The numbers behind the valuation of Nvidia highlights the dangers of such excitement. If you add up analysts’ estimates for the company’s free cash flows over the next five years, discounted at 10%, you arrive at about $650 billion. 

Nevertheless, Nvidia’s enterprise value is approximately $4.5 trillion. More than $3.8 trillion of its valuation is essentially a wager on cash flows after 2030.

As per the Financial Times,

“Add up analysts’ estimates of the next five years’ worth of free cash flows, discount them back at a 10 per cent rate, and they total just $650bn. In other words, the remaining $3.8tn of enterprise value represents cash arriving from 2030 onwards.”

This sort of forward pricing is an expression of utter faith that Nvidia can not only dominate the AI market but continue to see near-monopolistic growth decades down the line.

A Bubble Zone

The similarities with past market bubbles cannot be overlooked. As Rob Arnott explained to Forbes, “Bubbles burst not because the story is completely wrong, but because around the margins the story is wrong. 

The story of the rate of growth, the time horizon of growth, is unrealistically optimistic, and the risk of competition eroding market share is underestimated.”  Nvidia’s story is strong and its expansion is genuine, but whether it will meet its massive expectations is the issue looming over every optimistic investor.

The Burden of Expectations

Nvidia has been rewriting history in the markets and redefining expectations for investors, its climb has been incredible. However, with great power comes great responsibility. The valuation of the stock is more of a bet on the company to sustain an unprecedented growth pattern through the 2030s rather than an endorsement of current dominance. 

The energy supply challenge, the threat of competitive pushback, and the mere weight of keeping innovation at scale intact makes the tale of Nvidia potentially tested earlier than later. 

At least for the time being, the stock continues to soar higher, but the inflexible factors of infrastructure and competition ensures that the way ahead may not prove quite as friction-free as its latest rally would have us believe.

The stock now has the burden of global benchmarks, whole industries, and trillions of assumptions about future cash flow on it. That makes it both a wonderful and a possible cautionary tale. Expansion can certainly persist, but it will demand perfect execution, robust infrastructure, and the capacity to remain ahead of hungry competitors demanding a share of the AI slice.

If the firm delivers, Nvidia will be the defining stock of this generation. For investors, the choice now is whether they believe Nvidia will be the next decade’s titan, or this decade’s bubble.