For years, some UK investors have complained about the lack of Nvidia (NASDAQ:NVDA) in FTSE 100. They didn’t really want a clone of the AI chip maker, just a lot of stock going up at an incredible rate in a short period of time.
Nvidia did exactly that, rising nearly 1,000% in the three years following the release of ChatGPT in late 2022. The chatbot started the whole AI revolution, Nvidia’s chips still power it today.
However the FTSE 100 has one. That’s right Rolls-Royce (LSE:RR), the unusual engine maker whose shares have exploded 1,120% a little over three years. Believe it or not, that’s actually better than Nvidia’s 700% gain at this point.
Image source: Getty Images
Rising profits
Now, these are obviously very different businesses – one makes jet engines and the other makes AI chips. But Rolls-Royce’s financial numbers were, in their own way, as impressive as Nvidia’s.
By 2025, underlying operating profit will reach around £3.5bn, up from £1.6bn in 2023. Meanwhile, the doubling time, the operating margin increases from 10.3% to 17.3%.
Accordingly, Nvidia’s profit has increased – it has quadrupled during this period!
Another commonality is that both companies have mastered the art of ‘hit and lift’. In other words, they regularly report earnings that exceed analyst expectations, and raise their future guidance.
For example, Rolls-Royce’s mid-term targets for late 2023 have been met, two years away. Meanwhile, Nvidia is still able to continue to post quarterly earnings, despite being perhaps the most closely watched company on Wall Street.
However, as Chris Beauchamp, senior market analyst at IGhe says:Rolls-Royce managed to do what Nvidia couldn’t – engineer a share price drop following the results.”
He was referring to yesterday’s (February 26) share price performance, when Rolls stock jumped 5.1% while Nvidia fell 5.5%. This despite the chip maker posting Q4 revenue of $68.1bn, a 73% increasing every year.
Beauchamp added: “It looks like the FTSE 100 version of Nvidia will continue to bring in investors, as it responds to renewed demand for defense spending across Europe and a new rise in the US. [spending] on the way again“.
Data center construction
There is one last way that Rolls-Royce is imitating Nvidia – data center growth. While the latter is packing them with its own AI processors, the FTSE 100 company is quietly cashing in on the AI powerhouse.
You see, its Power Systems division provides the massive support engines needed to keep the power-hungry AI servers running 24/7. By 2025, data centers helped increase revenue by 19% in this unit, including a 30% increase in energy production.
Nvidia fatigue
Nvidia’s stock price has been flat since August, suggesting a level of exhaustion for Nvidia. The AI revolution is making investors nervous, and the decline in big cloud spending over time is a big risk.
Does the same fate await Rolls-Royce? Maybe sometime, especially if the beat-and-ups are moderate and start to decrease. The stock is very expensive now, trading at about 40 times this year’s forecasted earnings.
In contrast, Nvidia will lead 24 forecast times. A significant discount on Rolls-Royce.
Of course, there is nothing stopping long-term investors from considering both stocks. But right now, my choice is Nvidia.
