Nvidia is growing up. It’s not settling down

Apple took three-and-a-half years to progress from a market capitalisation of $2 trillion to $3 trillion. Microsoft took just over two and a half. Nvidia made the leap in 12 weeks.

The maker of silicon chips at the centre of the hoped-for AI revolution is an exceptional case. The differences in how its stock moves, though — even compared with other tech mega caps — are worth a closer look.

In terms of how Nvidia’s stock behaves, the company is like an adult in a child’s body. And that poses challenges, particularly for investment risk managers.

From a stock market perspective, Nvidia doesn’t want to grow up

Carmine de Franco, BNP Paribas Asset Management

Apple, Microsoft and Nvidia each account individually for more than 6% of the S&P 500 index. It’s a role you could say Apple and Microsoft have grown into. As their scale swelled, daily excess returns declined. Bad days, meanwhile, became less bad.

This makes sense. Mega-cap stocks are widely held, including by less-spook-able institutional buyers. The biggest companies ordinarily have established and settled businesses with stable prospects.

The same does not entirely hold with Nvidia. “From a stock market perspective, Nvidia doesn’t want to grow up,” says Carmine de Franco, head of quant equity portfolio development at BNP Paribas Asset Management.

De Franco has run some numbers that underscore the exceptionalism. “As companies mature and make it to top spots in the index, one may expect their daily excess return would somehow be dampened in both directions,” he writes in an analysis shared with Risk.net.

Excess daily returns for Apple and Microsoft from their listings to today have been negatively correlated to their weight in the index. For Nvidia, by contrast, the correlation falls beneath the bar of statistical significance. The company has grown up but, so far, has not settled down.

De Franco looked at the three tech firms’ biggest daily losses. For Apple and Microsoft daily losses have shrunk as the companies have grown bigger. Nvidia’s, by contrast, seem to have stayed more or less unchanged.

Nvidia’s worst 5% of bad days since it grew to be 6% of the index have seen losses twice the level of Apple and Microsoft at the same point of scale.

Meanwhile, Nvidia’s stock seems unlikely to stabilise. When the company announced quarterly earnings last week, consensus-beating revenues – double last year’s – failed to lift Nvidia’s shares, which were down 7% on Friday

Recent experience shows how much this can mean. In the two months from mid-June to August 7, Nvidia lost almost a trillion dollars in market value. That’s half the entire value of the German stock exchange, de Franco notes.

All this arguably has a bearing also on the kind of market fragility that investors endured at the start of August.

Nvidia functions as the bellwether of the broader tech trade.

And the size of its market capitalisation, too, facilitates the build-up of crowded positioning, says the head of equity risk at another asset manager.

“A billion-dollar company could have high volatility but there’s a limit to who can own it. When a company is worth $3 trillion, a lot of money can move behind that.”

Options markets were implying a low double-digit percentage move in Nvidia stock ahead of earnings. Multiplied by market capitalisation, that suggests a $300 billion loss in value, he points out.

For risk managers, earnings from Nvidia and other mega-cap tech companies such as TSMC are now almost as important as a Fed rates decision or US economic data releases, the risk manager and peers report.

The Federal Reserve and the US economy, though, may be expected to throw up fewer surprises.

As BNP’s de Franco puts it: Nvidia is a company now more than 30 years old that looks at the unfolding of the AI revolution from a position of strength and is one of the biggest members of the S&P 500 Index.

“It is not yet behaving as its mega-cap status would imply.”