If there is one stock that became the cornerstone of US stock market rally in recent times, it is NVIDIA.
The company which was initially focusing on gaming chip development, re-invented itself to became a market leader in the AI chip development.
Kudos to its management, the company identified the growth opportunity before any other Chip company, including Intel, now commands a dominant market share and stock market is more than happy to offer a premium valuation to its stock. Let us analyze the rise of NVIDIA in AI chips market today.

A brief History:

Founded in 1993 by three American Computer Scientists, namely, Jensen Huang, Chris Malachowsky, and Curtis Priem company’s intial goal was to develop graphics-based computing and video games.

The key events in its history are listed below.

1. When it was founded, the company received $20 million in venture capital funding from firms like Sequoia Capital.

2. NVIDIA became a publicly listed company on January 22, 1999.

3. In the year 1999-2000, the company released the GeForce 256, which introduced onboard transformation and lighting (T&L) to consumer-grade hardware. NVIDIA won the contract to develop the graphics      hardware for Microsoft’s Xbox game console, earning a $200 million advance. In 2000, NVIDIA released the GeForce2 GTS.

4.The company acquired the intellectual assets of 3dfx in 2002.

5.In 2006, NVIDIA released its Compute Unified Device Architecture (CUDA) platform, which marked a significant step toward later AI and deep learning technology.

6.NVIDIA was named Company of the Year by Forbes in 2007.

7. After 2010, NVIDIA’s business model shifted toward industry-oriented practices, focusing on high-demand tasks like blockchain mining, data storage,
and AI

8.2012 – Release of the GeForce GTX 680, based on the Kepler architecture, which significantly improved GPU performance and efficiency

9.2016 – Introduction of the Pascal architecture, further enhancing GPU performance and capabilities

10.2018 – Release of the Turing architecture, which pioneered real-time ray tracing technology in consumer GPUs

11.2021 – Launch of the GeForce RTX 30 series, featuring the Ampere architecture with major advancements in GPU power and efficiency

When we look at it, it is obvious that NVIDIA has constantly innovated it’s products and even launched new product lines along with changing markets.
NVIDIA also was successful in identifying the technological shifts that was happening in the market and adapting to it at early stages.

What justifies NVIDIA’s premium valuation:

NVIDIA valuation can not be justified if you look at its high price-to-earnings (P/E) ratio and the intense competition in the semiconductor industry.
Why is market, then ready to give this valuation premium to the stock.

Market Position and Financial Performance:

NVIDIA’s strong market position in AI chips market and impressive financial performance have justifies its high valuation. The company’s dominance in the GPU market and its leadership in AI have driven significant revenue growth and profitability.

Innovation and Research and Development:

NVIDIA’s commitment to research and development has allowed it to stay ahead of the competition, delivering high-quality products and maintaining cost-effective operations. This dedication to innovation has contributed to its impressive profit margins

Unparalleled Re-Invention Capacity:

The company has a proven track record of adapting to the changes in market and re-invent its products constantly. For example, consider its shift from a video gaming company to AI chip company.

Intel’s reliance on TSMC for chips:

Its main competitor Intel relies on TSMSC to get its chip design whereas NVIDIA does it in house. This helps NVIDIA to secure a competitive edge on Intel.

In conclusion, we still don’t know if the high PE is sustainable given unpredictable nature of markets, but there are some valid reasons behind this premium valuation.