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One of the most successful tech investors says chipmaker Nvidia could be worth nearly $50 trillion within a decade — more than the current market capitalization of the entire S&P 500 stock index.
James Anderson, known for being an early investor in Tesla, Amazon, etc., said, “Even in the most optimistic outcome, NVIDIA’s potential scale is bigger than I’ve ever seen, with a market cap that could reach double-digit trillion dollars. This is not a prediction, but it’s a possibility if artificial intelligence works for customers and NVIDIA maintains its lead.”
Nvidia has been one of the biggest beneficiaries of the surge in demand for chips that can train and run powerful generative AI models, such as OpenAI’s ChatGPT.
Its shares have surged 162% since the start of the year, giving the chipmaker a market capitalization of more than $3 trillion, 20 times the roughly $150 billion it was worth in August 2018, when Apple became the first company to reach $1 trillion in market capitalization.
Nvidia CEO Jensen Huang has declared the company to be at the heart of a new “industrial revolution,” and in June it briefly overtook Microsoft and Apple to become the world’s most valuable publicly traded company.
The company’s “sustained breakthroughs, competitive advantages in hardware and software, and culture and leadership are exactly what we’re looking for,” said Anderson, who last year partnered with Italy’s Agnelli family holding company to set up Lingotto Investment Management, which runs a $650 million fund whose largest position is in a U.S. chipmaker.
Anderson is best known for his nearly four decades at Baillie Gifford, where he led the firm’s flagship Scottish Mortgage Investment Trust and made its first acquisition of Nvidia in 2016, helping to turn the Edinburgh-based private partnership into a surprise star in tech investing.
When Scottish Mortgage began investing in Nvidia, “it wasn’t clear what the primary driver would be. We didn’t decide whether it would be gaming, cryptocurrency, self-driving or AI, we just let it happen,” Anderson said.
He added that a big difference between semiconductor companies and other successful investments is that “Amazon, Tesla and the like didn’t start from a position of high profitability and dominance; they had to get there.”
A crucial influence on Anderson and Baillie Gifford’s investment process has been the academic Hendrik Bessembinder, who found that over decades, just 4% of stocks accounted for all net wealth creation, providing the basis for their belief that fund managers should try to identify companies that are extreme winners.
In a letter to investors earlier this year, Anderson explained why Nvidia falls into this category.
Anderson wrote that real growth in data center demand for AI chips appears to be about 60% per year. Looking ahead to the next decade, he said that if data center revenue alone were to grow 60% for 10 years and margins remained constant, earnings per share would be $1,350 and free cash flow would be about $1,000. Assuming a 5% free cash flow yield, Nvidia shares would be worth $20,000 in 10 years, giving the company a market cap of $49 trillion. Anderson puts the probability of this outcome at 10% to 15%.
The current market capitalization of all companies in the S&P 500 is approximately $47 trillion.
“What’s most important to us is that not just AI but the use of GPUs in AI has evolved over time, from excitement to potential pause to industry transformation,” Anderson said.
He said future trends are likely to be volatile and he wouldn’t be surprised if Nvidia’s stock price fell 35% to 40% at one or more points. “Those things happen, and if that happens, I’d buy more,” he said.
Nvidia’s shares currently trade at more than 47 times next year’s expected earnings per share and have accounted for nearly 30% of the S&P 500’s 17.7% gain this year.
The growing influence of Nvidia and other big tech “mega-cap” companies on broader stock-market indexes presents challenges for fund managers who don’t own those companies. Terry Smith’s global fund, for example, underperformed its benchmark earlier this year after avoiding the chipmaker’s shares because “we are not convinced its outlook is as predictable as we would like it to be.”
When asked if generative AI is overhyped, Anderson said, “There may be hype around narrow-scope generative AI for basic consumer tasks, but I think the big question is whether it can solve serious problems like self-driving cars, robotics, drug discovery, etc. 10 years from now. In that sense it’s the opposite of hype. NVIDIA is quietly but steadily leading the way in supporting and delivering in these areas.”
This article has been corrected to say James Anderson runs a $650 million fund, not the $650 billion he previously stated.
