Investors of a certain age may remember the 1997 movie L.A. Confidential. Set in Los Angeles in the 1950s, it features a crime syndicate run by high-class call girls.
These ladies were a cut above the rest. They had received plastic surgery to make them look like real-life movie stars. The character played by Kim Basinger resembled Veronica Lake. Another woman looked like Marilyn Monroe.
This classic movie may now be playing out in this year’s stock market. Several companies are tailoring their business models to look like today’s leading star — Nvidia. At least three companies are copying Nvidia’s pitch. They are straightening their jaws and adding Botox to resemble the belle of the ball.
Nvidia was founded by Jensen Huang. The founder came to America from Taiwan in 1982 to attend a boarding school in Kentucky. As a teenage schoolboy, he faced racist bullying, but these early challenges did not deter him from building a chip behemoth.
Nvidia has features that are hard to find. It spent the last two decades making chips that improved graphics for gamers. With ChatGPT’s launch in October 2022, Nvidia’s chips became the driving force of the AI boom. Nvidia makes the complex calculations to create OpenAI’s ChatGPT.
Its revenue is set to triple in FY2023 and FY2024. The market is expecting its ebitda to rise 11-fold to US$87 billion ($116 billion) between FY2023 and FY2026.
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Nvidia’s ascent has been unique. A US$100 invested in the stock in the dark days of March 2020 would be worth $1500 today. It does not seem to be in bubble territory. According to Aletheia Capital’s Warren Lau, it trades at a similar forward PE multiple as it did a year ago despite rising 265%.
It has risen sevenfold since Oct 14, 2022. With a market cap of US$2 trillion, it is now the third largest company in the world. The ascent has been so rapid that Apple and Microsoft are put in the shade. Nvidia took just 180 days to rise from a US$1 trillion market cap to a US$2 trillion market cap. This is a third less than Apple and Microsoft did.
Its imitators have adopted a common script. They have made the pitch that AI will dominate chip demand. Advanced Micro Devices view AI as a game changer like the Internet was in the 1990s. It plans to replicate Nvidia’s success.
AMD’s CEO, Lisa Su, is a distant relative of Jensen Huang. They have more than just blood in common. AMD wants to hunt down Nvdia’s AI chip success.
Fighting an incumbent in the chips business is not new for AMD. In 2010, it posed a serious threat to Intel, which was then dominating the PC chip business. It displaced Intel in many PC chip categories.
The market is bracing for frenetic growth by AMD. The street expects AMD to increase its ebitda from US$4 billion in FY2023 to US$10 billion in FY2025. This growth seems to be priced in. At 49 times FY2024 P/E, AMD seems to be at almost half Nvidia’s valuation. Its ebitda margins are also about half that of Nvidia’s.
Micron Technology is another company seekWatch out for Nvidia’s clones ing the surgical knife. This company produces memory chips that will power the AI boom. Its CEO, Sanjay Mehrotra, was jubilant in the latest earnings call. Chip prices are about to rebound after many years of low prices. The potential market for its products is at least three times higher today than a year ago. Micron seems cheaper than the big daddy. The market values it at 6 times EV/ sales and 14 P/E.
The ace in the pack may be a company that is not a chip maker. Super Micro Computer makes far less flashy servers. It supplies companies that are building AI capability. There is frenetic demand for AI servers. Its revenue is set to double in FY2024.
Super Micro’s stock price has risen 12-fold in the last year. It has eclipsed Nvidia which is up only threefold in that period.
The best could be yet to come. It may soon enter the S&P 500 index. It has just raised US$1.5 billion to fund its growth. Kim Basinger’s character was cut to look like Veronica Lake. She was said to be better than the original. Investors need to watch out for the next Nvidia.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era
