(Bloomberg) — It was 1999. Steve Jobs had recently returned to lead Apple. Intel was the dominant force in semiconductors. And a little-known chipmaker called Nvidia made its debut on the Nasdaq stock exchange.
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It took less than three years for Nvidia Corp. penetrated the S&P 500, replacing disgraced oil trading conglomerate Enron.
But even then, few would have bet that the company would become the best-performing stock of the past quarter century, with a total return of 591.078% since its IPO, including reinvested dividends. It’s a difficult number to comprehend and partly a testament to the financial mania surrounding artificial intelligence and the way investors have come to see Nvidia — which makes the cutting-edge chips that power the technology — as the biggest winner of the boom. .
On Tuesday, that run culminated in Nvidia Microsoft Corp. dethroned as the world’s most valuable company with a market cap of $3.34 trillion. More than $2 trillion of that value has been added this year.
The company’s rise was by no means assured — and neither was its staying power at the top of the S&P 500. Long-term investors in Nvidia have had to deal with three annual price drops of 50% or more in the stock. To continue the current rally, customers will have to continue spending billions of dollars every quarter on AI equipment, the return on investment of which has so far been relatively small.
What ultimately paved the way for Nvidia to rise to the top was the company’s big bet on graphics chips and co-founder and Chief Executive Officer Jensen Huang’s vision that the industry would shift toward what he calls “accelerated computing.” . something its chips are inherently better at than the competition.
“I think you have to give the management team a tremendous amount of credit,” said Brian Mulberry, client portfolio manager at Zacks Investment Management. “They have handled every wave of hardware innovation perfectly.”
Here’s a look at Nvidia from its IPO to now.
Early years
Nvidia got off to a good start.
Between its debut and the time it entered the S&P 500, the stock gained more than 1,600%, giving it a market value of about $8 billion. That rise came as many other technology stocks collapsed in the wake of the dot-com bubble, which peaked in March 2000.
The key to the company’s early success: getting the technology into video game consoles like Microsoft’s Xbox and Sony’s PlayStation. Nvidia’s GeForce graphics processing units, or GPUs, became objects of desire among gamers because they consistently offered the most realistic experience.
“Jensen was always a great communicator, told a good story, and it’s clear that GPUs were becoming increasingly important,” said Rhys Williams, chief strategist at Wayve Capital Management, which was a buyer in the IPO. “Each successive generation of hardware delivered much better performance, much more realistic visuals, and that’s when PC gaming really took off.”
Litigation and competition
The next six years were not kind to Nvidia. The stock plunged in 2008 as the financial crisis weakened demand and long-struggling rival Advanced Micro Devices Inc. things started to change.
Meanwhile, an agreement between Nvidia and Intel that allowed the companies to use each other’s capabilities went wrong, forcing Nvidia out of one of its biggest markets. The two settled in 2011, with Intel agreeing to pay Nvidia $1.5 billion.
The following year, Nvidia unveiled graphics chips for servers in data centers. They could help with advanced computing work such as oil and gas exploration and weather forecasting, giving Nvidia a foothold in what would become a lucrative market. However, those chips didn’t immediately fly off the shelf. It would take nearly nine years for Nvidia stock to surpass its 2007 record.
Crypto and Covid
In 2015, Nvidia shares rose again. During that period, the company’s chips became the foundation of emerging technologies, from advanced graphical interfaces to autonomous vehicles and a new wave of AI products.
That’s when Shana Sissel, CEO of Banrion Capital Management, first really took notice of the company. She described a 2017 conference where Nvidia looked more like an election winner than an investment idea.
“Every speaker talked about Nvidia being the most important company,” Sissel said. “It was really on my radar screen at that point.”
Even after demand from cryptocurrency miners dried up, data center sales continued to grow. The Covid-19 pandemic has given that business a boost, as companies have had to purchase additional computing power to support remote work. Nvidia’s data center revenue increased by a multiple of eight between fiscal 2017 and fiscal 2021.
AI sales are exploding
Nvidia shares tumbled in 2022 along with the rest of the tech sector, which was battered by rising interest rates and falling demand after the Covid-era boom.
OpenAI’s release of ChatGPT in late 2022 made an immediate splash, but it took a while for investors to realize how Nvidia could benefit from it. Ultimately, interest in ChatGPT and other generative AI products exploded, leading to a crazy surge in orders for Nvidia chips.
When the company reported earnings for the first quarter of 2023, the size of the jump in its business shocked almost everyone on Wall Street. Nvidia gave a quarterly revenue forecast that was more than 50% above the average forecast.
Nvidia’s data center sales surpassed gaming revenue for the first time in fiscal 2023. In Nvidia’s current fiscal year, analysts expect these sales to exceed $100 billion.
“They have a very defensible place in the industry,” said Williams, the strategist at Wayve Capital Management. “They obviously won’t take 95% of the market share forever, but it would be almost impossible for anyone to replace them.”
–With help from Ian King.
(Adds this year’s market cap increase in fourth paragraph. An earlier version of the story corrected the spelling of a name in the first paragraph.)
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