Why are Nvidia’s shares soaring?

Nvidia Corp on May 30 breached $1 trillion in market capitalization, making it the first US chipmaker to join the trillion-dollar club. The shares of world’s most valuable chipmaker continued to surge after a bumper earnings report last week. The gaming and AI chip company, whose shares rose 3.8% in trading before the bell on Tuesday, was valued at $1.03 trillion.

AI took center stage after Nvidia stunned investors by reporting a quarterly profit of more than $2 billion and revenue of $7 billion, both exceeding Wall Street expectations. The bumper earnings report also forced Wall Street to reassess the potential windfall for the chipmaker from an artificial intelligence boom.

Nvidia’s market valuation

 The unveiling of a new AI supercomputer on May 30 briefly drove Nvidia's market value above $1 trillion, following blowout earnings. The gaming and AI chip company, whose shares rose 3.8% in trading before the bell on Tuesday, was valued at $1.03 trillion due to a surge in demand of artificial-intelligence (AI) chips — widely used to power ChatGPT and other such devices. Its $1 trillion valuation makes it the fifth most valuable US company behind Apple, Microsoft, Alphabet and Amazon

From gaming to AI: Nvidia's focus shift

Nvidia co-founded in 1993 by Jensen Huang is known for its chips used in videogames. The company proved more successful than its peers at developing chips that turn computer code into the realistic 3D graphics that computer gamers love.

The company's business rapidly expanded during the pandemic when gaming took off, cloud adoption surged and crypto enthusiasts turned to its chips for mining coins.

In less than a decade, Nvidia’s data center business has grown from $300 million in annual revenue to $15 billion. The Data center chip business accounted for more than 50% of the company's revenue in the financial year ended Jan. 29.

Generative AI a hot topic

The viral chatbot, ChatGPT, has made generative AI a buzzword this year. In the tech industry's fierce battle for AI dominance, the advanced chips needed for generative AI, such as the ChatGPT chatbot, are key and Nvidia is the leader in AI chip manufacturing. Nvidia's chips are used in applications ranging from robotics and the metaverse to medical imaging and video analytics. 

Microsoft Corp and Alphabet Inc-owned Google, two of the biggest players in the space, believe that generative AI can change how work is done. The two have raced to add the technology to their search engines and productivity software as they seek to dominate the industry.

Goldman Sachs analysts estimate that US investment in AI could approach 1% of the country's economic output by 2030, Reuters reorted. 

Nvidia's role in AI boom

The large computers that process data and power generative AI run on powerful chips called graphics processing units (GPUs). They are designed to handle the specific kind of math involved in AI computing very efficiently. According to some analysts, Nvidia, the leader in AI chip manufacturing, produces about 80% of GPUs 

OpenAI's ChatGPT , Which made generative AI a buzzword this year, was created with thousands of Nvidia GPUs. Tesla CEO Elon Musk has also secured GPUs from Nvidia for his AI startup, the Financial Times reported in April.

Nvidia's rivals in the market

Advanced Micro Devices and AI chips made in-house by Amazon.com, Google and Meta Platforms are main competitors of Nvidia in generative AI chip market