Nvidia just showed the world it's the AI king

• Nvidia just proved why it really is the king of AI.
• The chipmaker reported bumper revenues of $22.1 billion for its fourth quarter, surpassing expectations.
• Nvidia has grown rapidly as its chips provide vital processing power to AI players.

It sure seems like Nvidia is the king of AI right now.

Since the start of the AI boom, the Santa Clara-based tech giant has gone on an outrageous growth journey as the rest of the tech world has come to its door begging for chips, known as GPUs, to power their AI ambitions.

Here are some numbers for context. Nvidia began 2023 worth $350 billion, and ended it at $1.2 trillion. At the start of the week, it stood at $1.8 trillion. You can do the math.

Here's another way of looking at it. Nvidia is now worth more than the entire Chinese stock market; more than all the energy stocks in the S&P 500 combined; and big enough to briefly become the third most valuable US company.

But in case anyone needed another reminder of who rules the AI roost, Nvidia delivered it on Wednesday.

The chip firm announced $22.1 billion of revenue in its fourth quarter, some 265% more than the same period the previous year, blowing analyst expectations out the water in the process. It also forecast revenue of $24 billion for the current quarter.

Nvidia stock surged as much as 14% in premarket trading Thursday.

"Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries, and nations," Nvidia CEO Jensen Huang said.

How Nvidia rose to the top

The Silicon Valley firm has positioned itself as an integral part of the AI ecosystem by supplying its GPUs to companies desperate for the hardware needed to train their generative AI tools.

OpenAI uses the processors. So too do Google, Microsoft, and Amazon. Last month, Meta chief Mark Zuckerberg said his company will have stockpiled about 350,000 of Nvidia's top-line H100 GPUs by the end of the year.

Demand for these chips has been so hot that it has led Huang to be anointed "the godfather of AI" and Nvidia more broadly as "the most important stock on planet Earth" by Goldman Sachs before the hotly anticipated earnings report dropped on Wednesday.

There are a few reasons why Nvidia has become indispensable to tech firms trying to take advantage of the AI gold rush.

For one, it has a sophisticated software system called CUDA that effectively makes using its chips as simple as a plug-and-play model for companies — despite how complex or varied their AI models and workloads might be.

The other reason Nvidia has seen such crazed demand is that there has been a shortage of its chips. Supply chain issues triggered during the pandemic have had a knock-on effect on production — issues that are yet to be fully resolved.

As a result, companies have been scrambling to get their hands on Nvidia's chips as fast as they can to make sure they have enough computing power to power their AI applications, and get an edge over competitors.

A never-ending bull run?

There is reason to question just how long this crazed run for the stock can last.

In 2023, about a fifth of Nvidia's revenue was generated in China — a market that's become increasingly difficult to engage with due to tough US export controls that bar companies from shipping their most advanced products there.

In Nvidia's case, that has meant bans on sales of its top-of-the-range H100 and A100 processors and triggered reports it will launch watered-down versions in China in the second quarter of 2024.

Whether Chinese firms will be scrambling over each other to secure these is another matter.

Demand for downgraded chips risks being reduced amid ferocious competition between companies in China to get ahead on AI. That's especially so as domestic players seek to offer chips that can rival the very best Nvidia has to offer.

A Reuters report in December, for instance, noted that Chinese tech giants Huawei and Tencent, as well as smaller chip firms such as Hygon Information Technology, were busy marketing their AI chips to local customers.

Competition is getting stronger in the West too. The CEO of AMD, Lisa Su, unveiled a new MI300X chip in December — a rival to Nvidia's H100, which she described as "the most advanced AI accelerator in the industry."

In addition, Nvidia management has indicated that its supply of chips will continue to improve. This has contrasted with recent quarters when Nvidia "explicitly talked to demand exceeding product availability," Wedbush analyst Matt Bryson said.

"Moving from shortages to adequate supply is always a dangerous shift as backlog necessarily gets worked down, meaning shipments outstrip true demand," Bryson said in a note.

Meanwhile, the likes of OpenAI's Sam Altman and SoftBank's Masayoshi Son are reported to be exploring hugely expensive chip ventures of their own to compete with Nvidia and resolve some of the ongoing supply constraints.

These initiatives, however, will require huge effort and investment if they hope to stand a chance of taking on Nvidia.

As Kathleen Brooks, research director for online broker XTB told BI: "I have rarely heard a CEO be so bullish, so committed to this theme, and so convinced that this is the future."

Expect Nvidia to remain a dominant AI force for the foreseeable future.