The artificially intelligent way to be worth $1 Trillion
AI can do many things. Among them, it can help increase valuations for companies in that space. One example from this week: Nvidia is about to reach a trillion dollar valuation.
What is Nvidia? The company was established in 1993 and soon started designing graphics processors which excel at manipulating computer graphics and image processing. That’s something which video game players appreciate the most.
From relative obscurity it has risen to become one of the most important tech companies. Nvidia has designed processors for Microsoft‘s Xbox or Sony’s PlayStation. It also designs chips for mobile devices, self-driving cars, and any application where processing images fast with high resolution is required.
What’s the connection to AI? It turns out that Nvidia’s chips are well suited for training AI models, like GPT-3. Companies like Amazon, Google or Microsoft (to name a few famous ones) are buying the chips by the truckloads and incorporating them in their data centers.
The company shares are now (as of May in 2023) trading close to $400. Who knew in 2003 when it was only $8 …
But this is not the point of this post. The current rush to buy the stock reminds me of the old proverb coined about the Klondike Gold Rush in 1896: ‘During a gold rush, sell shovels.’
The thing is that Nvidia is not the only chip maker on the market. You have Intel, AMD and many others which race each other to develop and manufacture chips for every imaginable application.
So, who is selling shovels to these companies?
One example is ASML, a company which most likely you have never heard of before. However, ASML is one of the largest ‘shovel makers’ in the world. Interestingly enough, if you had bought its stock in 2003 you would have paid EUR 8. It is trading now at EUR 680 (about USD $730).
If you’re curious, you can check how many steps are required in order to produce one processor. The list is very long, and all the chip makers have to buy them. They don’t know how much demand there will be for their products, but they have to buy the shovels regardless.
I am not advising you, my dear reader, to start buying stock or invest in any particular company. This is a simple exercise in understanding how things fit together.
You might be a startup and you are trying to get into the market. Do you understand where your product fits? Do you know where you can deliver value to your customers and not have to worry about competition?
You might be a company with a large number of suppliers, and you need to map (and mitigate) the risk in your supply chain.
Or you might be an investor and want to know if a stock of one company goes up which other companies might benefit from it.
The recurrent pattern? On rare occasion, you strike gold. But making shovels is what really makes you money.