Nvidia dethrones Microsoft to become world’s most valuable company - should you invest?

Nvidia has become the world’s most valuable company after the chipmaker's share price rose to an all-time high on Tuesday 18 June.

The Californian company, which started life in 1993 as a specialist provider of 3D graphics for computer games, overtook Microsoft on the back of its share price nearly doubling since the start of this year. In February, Nvidia became the fourth biggest company in the world.

A boom in artificial intelligence (AI), and billions of pounds worth of sales to the biggest tech companies, has seen Nvidia take the top spot ahead of Microsoft, Apple, Alphabet, which owns Google, and the state-owned oil giant Saudi Aramco.

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Christopher Rossbach, investment head at J Stern & Co, says: “We believe that AI and the metaverse will have a transformative impact on the global economy and on the companies driving innovation and growth. 

“Nvidia has been our strongest position year-to-date and we continue to believe that it has extraordinary prospects for growth and value creation.”

Nvidia’s share price – what’s behind its meteoric rise?

Nvidia has easily been the best performing of the Magnificent Seven tech stocks in recent years. Over the past five years, it has grown by more than 3,000%. 

Investors looking to profit from the rising tide of AI have been snapping up the stock, making it one of the most popular investments on DIY platforms. This, combined with a string of impressive results, has propelled its rise. 

The company reported its most recent earnings on 22 May – and they were impressive. First-quarter revenue was $26 billion, up 18% from the previous quarter and up 262% compared to a year ago. 

In addition to its chips, growth in the company’s data centre business has been driving its strong performance. Data centres made up 87% of overall revenues in the first quarter. 

The company’s ascent is “remarkable”, says Russ Mould, investment director at AJ Bell, “particularly as it is now considered to be more valuable than one of the most lauded electronic device makers in the world”. 

He adds: “There is a feeling that as long as Nvidia’s share price is rising, investors are happy and everything is fine on the markets.” 

As far as the S&P 500 is concerned, this has quite literally become the case in recent years. Nvidia has accounted for around a third of the S&P 500’s overall return so far this year. This makes concentration risk a concern for many investors – something we have explored elsewhere when looking at whether it’s time to ditch tracker funds.

Should you invest in Nvidia?

Nvidia’s share price continues to reach record highs – and investors on the sidelines will be disappointed they didn’t snap it up earlier. But there are risks associated with investing at the top of the market. This begs the question, will Nvidia continue to soar?

"Such stratospheric share price rises can come with a drawback," says Richard Hunter, head of markets at interactive investor. "The bar has now been raised, meaning that the shares could be vulnerable to disappointment, with increasing pressure on the company to surprise to the upside." 

Generative AI requires enormous computing power to work, and Nvidia’s chips facilitate this. They can carry out technical processes faster and with greater energy efficiency than many competing chips. The company describes itself as having “pioneered accelerated computing to tackle challenges no one else can solve”. 

Some valuation-focused investors might worry that Nvidia – and Big Tech in general – has entered a bit of a bubble. But investors believe AI will revolutionise the world around us. It’s these future opportunities that they are pricing in. 

Of course, there are risks associated and a regulatory clampdown could create headwinds. There are also concerns that AI is too energy-hungry, and that electricity grids might not be able to cope. We explored this topic in a recent MoneyWeek article: Should you invest in the US stock market and will Big Tech crash?