Stock markets and share prices reflect a mix of the expectations of investors for today and for the future. We can debate the weighting of that mix but there is one universal truth. When share prices and financial markets move significantly they are telling us there is change in current market conditions or investors’ expectations. So, when the valuation of one company which nobody had heard of a year ago increases by one trillion dollars in just 4 months we need to pay attention. In December we wrote about Artificial Intelligence (AI) chip maker, Nvidia, and its meteoric 240% growth in value to a $1 trillion market cap during 2023. However, we were quick to point out that it was not just Nvidia’s share price which was rocketing; revenues from its AI chips used in data centres were moving at a similar 279% clip. In fact, we suggested there was more in the tank for Nvidia:

“So, if you were wondering whether a share price moving by more than 200% in less than a year sounds like irrational exuberance you’d be wrong too”

Fast forward to last week’s quarterly results from Nvidia and another forecast-busting report. In the 24-hours after those results the valuation of Nvidia increased by the greatest dollar amount ever seen in history for one company in a single trading session. The $277 billion change in Nvidia’s market value in just one day grabbed the headlines but there are a few other numbers which we believe better capture the quantum of change being additionally recognised by investors:

*Investors in the space of just 4 months have decided that Nvidia’s AI and data centre opportunity has increased in value (market capitalisation) to $2 trillion. Yep, the company’s value has doubled from $1 trillion since late October last year.

*Total revenues for Nvidia grew on a year-on-year basis by 265%. However, the key revenue number for investors was the division which provides AI chips for data centres. Revenues at the Data Centre division grew by 409%.

So, let’s accept that the revenues and valuations attached to Nvidia are driven by an explosion of spending by data centre operator clients. However, in the wider world of cloud computing is there a danger our expectations for data centre infrastructure are already out-of-date? Investors have signalled to us (in their purchase of Nvidia shares) that there has been a trillion dollar change to Nvidia’s prospects in a matter of months. Of course, there can be hype and metaverse or crypto-type hoopla about a future market but Nvidia is telling us that real customers are buying real AI chips for real money (up to $40,000 each) in order to run their AI models and applications. Furthermore, Nvidia’s founder, Jensen Huang, is predicting an additional $1 trillion invested in data centre infrastructure “in the next few years”. Two other snippets stood out in that Wired interview with Huang:

*Nvidia is building a new type of data centre. Huang is calling them “AI factories” and that every company (and sovereign nation) will need these factories.

*On a global basis, Huang expects the number of data centres to double in the next 5 years.

Clearly, this is not just a Nvidia story. We have previously written about an infrastructure boom attracting global financial institutions, but we should continue to watch out for interesting moves, specifically in the data centre space. Also, it is worth keeping an eye on significant shifts in investment strategies by global private equity houses. One deal in the past week, and quite close to SilverBack’s back yard, caught the eye. Starwood Capital which has been a huge player in global real estate seems to be stepping up its data centre exposure. They have just taken an $850 million stake in Irish-owned Echelon Data Centres, valuing the company at $2.7 billion. This follows earlier news that private equity giant, Blackstone, is in talks (or a race!) to acquire Winthrop Technologies for a reported $1 billion. However, it’s not just Wall Street titans suddenly flexing their computing infrastructure muscles. Arguably, Big Tech companies have more investment dollars than anybody and Microsoft is showing form.

In recent days, the Seattle-based co-owner of OpenAI has announced $2.1 billion of investments in Spain. The spend is focused on AI and cloud infrastructure; sounds like more data centres. Indeed, Microsoft has spent more than $9 billion on European digital infrastructure in just the last 3 months. That also includes $3.5 billion invested in AI infrastructure and cloud capacity in Germany (we will be writing more on Germany soon). The Berlin government has its challenges, but Germany’s proud industrial history and its world-beating export culture is currently driving its stock market (Dax Index) to an all-time-high. However, performance is all relative. Indeed, who would have thought Nvidia would now be worth more than all 40 of Germany’s biggest companies…..combined!

Didn’t we say earlier that share prices reflect investor expectations of the future? Arguably, investors believe Nvidia’s future has changed to become potentially even bigger than the future of all of Germany’s greatest companies combined. That implies significantly more data centres in the future than in current projections. So, watch out for those announcements, as digital infrastructure tries to keep pace with Nvidia and its AI chip-buying customers.