Should you participate in the Nvidia rally?

Investors love to invest in the next-generation stocks. They bet on the trends of tomorrow.

One thing that the world knows for sure is that AI is going to be the future and hence investors do not want to miss out on the AI boom.

The excitement surrounding artificial intelligence (AI) peaked as chipmaker Nvidia exceeded expectations, leading to a 16% increase in their stock. 

This rally propelled stock markets across three continents to reach record highs. 

Nvidia, originally known for graphics cards in computer games since its inception in 1993, has become a major player in the AI industry. Its chips, particularly the H100, are widely utilized by tech giants such as Google, Microsoft, Amazon, and Meta for AI computing. Nvidia's success reflects the strong demand for AI technology, contributing significantly to the gains of the S&P 500 this year.

In the fourth quarter, Nvidia reported earnings per share of $4.93, exceeding analysts' expectations of $4.59. Their net income skyrocketed by 770% to $12.3 billion, surpassing the anticipated $10.4 billion.
Revenues for the fourth quarter reached $22.1 billion, surpassing Wall Street's expectations of $20.4 billion. This announcement was made on Wednesday evening. Nvidia also anticipates revenues to reach $24 billion for the current quarter.

Nvidia's data center division, a key revenue driver, generated $18.4 billion in the fourth quarter, representing a 409% increase from the previous year. Additionally, gaming chips contributed $2.9 billion in sales.

The company's success is directly linked to the growing demand for AI infrastructure. Its chips are essential for AI developers, particularly in the generative AI field, enabling technologies like OpenAI's ChatGPT. Not limited to Big Tech, industries such as automotive, financial services, and healthcare are investing billions in Nvidia's chips.

Sovereign nations like Japan, Canada, and France have also become significant customers as they utilize citizen data to develop AI models.

Despite the impressive results, there are challenges ahead for Nvidia. Many customers are developing AI chips of their own, which puts the company at risk of competition. Furthermore, Nvidia is limiting its product capabilities to continue selling to China due to new US export rules for the semiconductor industry. Sales to China now constitute a "mid-single digit percentage" of overall revenue, according to the company.

Investors are closely watching whether Nvidia can sustain its high growth rates, especially as it shifts focus to new products like the B100 AI chip expected to ship later this year. Some analysts see Nvidia's latest results as unprecedented, with Saxo Bank's head of equity strategy, Peter Garnry, calling it an "insane" result and questioning if this could be the last exceptional quarter.

The broader stock market context reveals that AI, represented by companies like Nvidia, is playing a significant role in the current market rally. Tech stocks, including Microsoft, Nvidia, Apple, Amazon, and Alphabet, make up almost a quarter of the value of the S&P 500. This concentration has led to comparisons with historical periods of market concentration, such as 2000 and 1929.

The ongoing excitement about AI breakthroughs, illustrated by companies like OpenAI and Google, along with optimistic sales forecasts from Nvidia, suggests continued growth in demand for AI-related infrastructure.

 However, analysts debate the sustainability of this AI stock market boom. Some argue that AI is still in its early stages, allowing for further growth, while others express concerns about potential regulatory actions and uncertainties about the future of AI.

Beyond the AI excitement, other economic factors contribute to the current stock market rise. 

Recent global developments, including easing tensions and stabilized oil prices, have positively influenced markets.

However, potential escalations in conflicts in Ukraine and the Middle East could lead to shortages and high inflation, impacting spending and confidence.

In summary, while AI, exemplified by Nvidia, is a key driver in the current stock market rally, various factors, including competition, regulatory actions, and global conflicts, pose challenges to its sustainability. The excitement around AI breakthroughs continues, but uncertainties in the broader economic landscape could influence the trajectory of the stock market.