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21 views4 pages

Untitled 41

Get lean

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jacques.harrison18
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© © All Rights Reserved
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Nvidia

Nvidia could reach $50tn market cap in a decade, says top tech investor
Early Tesla and Amazon backer James Anderson sees chipmaker’s potential scale as ‘way higher than I’ve
ever seen’

Nvidia chief executive Jensen Huang has declared the company is at the centre of a new ‘industrial revolution’ © Bloomberg

Harriet Agnew and George Steer in London JULY 14 2024

One of the most successful tech investors said chipmaker Nvidia could be worth almost
$50tn in a decade — more than the combined current market value of the entire S&P 500.

James Anderson, best known for his early bets on the likes of Tesla and Amazon, said: “The
potential scale of Nvidia in the most optimistic outcome is both way higher than I’ve ever
seen before and could lead to a market cap of double-digit trillions. This isn’t a prediction
but a possibility if artificial intelligence works for customers and Nvidia’s lead is intact.”

Nvidia has been the chief beneficiary of a boom in demand for chips that can train and run
powerful generative AI models such as OpenAI’s ChatGPT.

Its shares have surged 162 per cent since the start of the year, pushing the chipmaker’s
market value above $3tn — up 20-fold on the roughly $150bn the company was worth in
August 2018 when Apple became the first company to reach a trillion-dollar valuation.

Nvidia, whose chief executive Jensen Huang has declared the company is at the centre of a
new “industrial revolution”, briefly leapfrogged Microsoft and Apple in June to become the
world’s most valuable publicly listed company.
The company’s “persistent exponential progress, the competitive advantages in hardware
and software, and the culture and leadership are exactly what we look for”, said Anderson,
who last year teamed up with the holding company of Italy’s Agnelli family to launch
Lingotto Investment Management, where he runs a $650mn fund whose largest position is
the US chipmaker.

Anderson is best known for the almost four decades he spent at Baillie Gifford. There he
ran its flagship Scottish Mortgage Investment Trust, which first bought Nvidia in 2016, and
helped turn the Edinburgh-based private partnership into an unlikely star of tech
investing.

When Scottish Mortgage initiated a position in Nvidia, “it wasn’t clear what would be the
main driver — we didn’t decide if it would be gaming, crypto, autonomous driving or AI but
left it to the course of events”, said Anderson.

He added that the big difference between the semiconductor manufacturer and some of his
other successful bets is that “Amazon, Tesla etc didn’t start from highly profitable and
dominant positions but had to get there”.

A crucial influence on Anderson and Baillie Gifford’s investment process has been
academic Hendrik Bessembinder, who found that over many decades just 4 per cent of
stocks accounted for all the net wealth creation — providing the basis for their belief that
fund managers should seek to identify companies that are extreme winners.

Anderson outlined why Nvidia falls into this category in a letter to investors this year.
He wrote that real growth in data centre AI chip demand appeared to be running at about
60 per cent a year. Looking ahead over the next decade, he said 10 years of 60 per cent
growth in data centre revenue alone and with unchanged margins would translate into
earnings of $1,350 per share and free cash flow of about $1,000 a share. Assuming a 5 per
cent free cash flow yield, an Nvidia share might be worth $20,000 in 10 years, which
translates to a market capitalisation of $49tn. Anderson put the probability of this type of
outcome at 10-15 per cent.

The current combined market capitalisation of all the companies in the S&P 500 is roughly
$47tn.

“It is the long duration of the development of GPU usage in AI — and not just AI — from
excitement, through potential pauses, to transformation of industries that is most
important to us,” said Anderson.

He added that the path was likely to be volatile and that he would not be surprised if Nvidia
had one or more drawdowns of 35-40 per cent — “that’s what happens and I hope we’d buy
more in that event”.

Nvidia currently trades at more than 47 times its estimated earnings per share for the
coming year and is responsible for almost 30 per cent of the S&P 500’s 17.7 per cent gain
this year.

The growing sway of Nvidia and the largest tech “megacaps” over broader stock market
indices has provided challenges for fund managers who do not hold them. For example,
Terry Smith’s global fund lagged behind its benchmark in the first half of the year after
choosing to avoid the chipmaker because “we have yet to convince ourselves that its
outlook is as predictable as we seek”.

Addressing the question of whether generative AI has been overhyped, Anderson said “the
narrow generative AI for basic and consumer tasks may well be overblown, but we see the
big issue as whether it can solve serious problems in 10 years”, including autonomous
driving, robotics and drug discovery. “And in that sense it’s the opposite of hype . . . Nvidia
is quietly but firmly leading in backing and providing these areas.”

This article has been corrected to say that James Anderson runs a $650mn fund, not
$650bn, as previously stated.

Copyright The Financial Times Limited 2024. All rights reserved.

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