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Here's the rundown:

Today, we'll discuss two items in the news:

• What’s behind Nvidia’s nearly $300 billion rally

• Germany’s economy enters a recession

• Plus, our main story on semiconductors amid the AI gold rush

All this, and more, in just 5 minutes to read.

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IN THE NEWS

🫧 Nvidia Stock Soars, Extending AI Mini Bubble (WSJ)

It’s not the meme-stock and crypto mania of 2021, but a mini bubble related to artificial intelligence, born out of ChatGPT-inspired enthusiasm, has become a powerful force in markets.

Nvidia’s stock jumped more than 26% Thursday after forecasting an impressive 64% sales growth year-over-year, thanks to its high-end chip designs, which often power AI tech.

• The company’s projection for a record $11 billion in sales in the second quarter pleasantly surprised Wall Street analysts, who, on average, anticipated $7.2 billion in sales.

ChatGPT’s success, a topic we covered yesterday, has “spurred an arms race between tech giants to offer advanced AI features to their customers.” At the center of this race sits Nvidia, whose CEO Jensen Huang calls this their “iPhone moment.”

• Huang adds, “We’re seeing incredible orders to retool the world’s data centers.” He expects a trillion dollars worth of data center infrastructure will be upgraded to handle “accelerated computing” for generative AI tools like ChatGPT.

Why it matters
With a market valuation north of $950 billion, the company looks set to join the $1 trillion club — an exclusive list including Amazon, Alphabet (Google’s parent company), the energy giant Saudi Aramco, Microsoft, and Apple.

• Nvidia’s ability to cash in on the AI craze is powering other stocks higher, too, like its rival chip-designer Advanced Micro Devices, and the company that actually manufactures this tech, Taiwan Semiconductor, both climbing over 10%.

While recession fears and bank failures have weighed heavily on cyclical companies — firms particularly vulnerable to the whims of the business cycle, AI stocks have powered markets higher.

• The S&P 500’s information technology sector is up over 30% this year, compared to about 8.5% for the broader index, led higher by Nvidia.

But Bank of America research strategist, Michael Hartnett, calls the surge a “baby bubble.” He adds, “In 1999, internet stocks and strong macro forced the Fed to restart monetary tightening (raising rates),” and the “bubble popped nine months later.”

📉 German Economy Enters Recession (CNBC)

Europe's largest economy faced a technical recession in the first quarter of this year due to reduced household spending.

Recent data from the German statistics office reveals a downward revision of GDP, from zero to -0.3% for the first three months. This follows a 0.5% contraction in the last quarter of 2022, resulting in two consecutive quarters of negative growth, meeting the common definition of a recession.

• During the first quarter, German households experienced a 1.2% decline in spending as consumers showed reluctance in allocating their funds toward items such as clothing, furnishings, and cars.

Why it matters

The German economy has faced substantial pressure, especially following Russia's invasion of Ukraine and the subsequent decision by European leaders to sever ties with Moscow.

• “Germany did fall into recession at the end of last year, after all, as the shock in energy prices weighed on consumers’ spending,” said Pantheon Macroeconomics’ chief Eurozone economist.
  

• It’s unlikely that the German GDP will continue to drop in the upcoming quarters, “but we see no strong recovery either.”

The current economic situation occurs amid elevated inflation and interest rates throughout the region. Anticipations are for the European Central Bank to implement another rate hike at its upcoming meeting on June 15. Since July, the central bank has already raised rates by 3.75%.

• German Central Bank Governor, Joachim Nagel, stated earlier this week that the ECB has plans for "several" additional rate increases.

MORE HEADLINES

🌲 Dollar Tree falls 14% after disappointing quarter

👎 Credit rating agency warns it may downgrade U.S. due to debt ceiling crisis

📱 The ChatGPT mobile app is now available in 11 countries (including the U.S.)

THE ROARING CHIPS

The Roaring Chips

As we outline in the news today, Nvidia’s stock has soared in 2023, largely thanks to how critical its products are in empowering ChatGPT and other services from healthcare to cloud to computer hardware.

Today, Nvidia is one of the most valuable companies in the world, with a market capitalization greater than Berkshire Hathaway, Meta, and Tesla.

After its earnings beat Wednesday, CEO and co-founder Jensen Huang said the company had seen “surging demand” for its data center products because their “chips” work seamlessly with AI.

In more scientific terms, a “chip” or semiconductor is defined as a substance that has a conductivity between an insulator and that of most metals, either due to the addition of any impurity or because of temperature effects.

Devices made of semiconductors, notably silicon, are essential components of most electronic circuits.

In simple terms, a semiconductor is a material that controls a flow of electricity.

It’s difficult to think of an aspect of our lives that doesn’t involve semiconductors. The device you’re using right now, the fridge in your kitchen, and the smart TV you might binge shows on are all made possible by finely etched bits of silicon.

It’s the most manufactured item in human history. But how did it come to be?

A New Jersey lab

The transistor, a miniature semiconductor, was born in New Jersey in December 1947, after World War II.

Three physicists at Bell Laboratories in Murray Hill, N.J., built the world’s first transistor.

William Shockley, John Bardeen, and William Brattain had been looking for a semiconductor amplifier to replace the vacuum tubes that made radios and other electronics so bulky, hot, and energy-requiring.

Once they made their lab discovery, they didn’t speak of it to anyone for six months. They wanted to experiment further and apply for patents before word got out.

On June 30, 1948, they held a press conference in New York City, showing off a transistor model and a TV and radio with transistors in place of the tubes.

Nobody was talking about computers, but it was a first look at the future. The immediate response? The New York Times mentioned it at the bottom of its "News of Radio" column on page 46.

A Bell Labs engineer said then, "The transistor in 1949 didn't seem like anything very revolutionary to me. It just seemed like another one of those crummy jobs that required one hell of a lot of overtime and a lot of guff from my wife."

Gradual improvement

Only 20% of the transistors worked and were hard to manufacture. But the technology kept improving.

It got its first consumer application in December 1952 in a hearing aid, where it replaced one of three tubes and lowered battery costs. By 1954 the transistor was in 97% of hearing aids, and sales of the devices were up 50%. That year the first transistor radio came out.

Then, in 1959, Texas Instruments’ Jack Kilby and Fairchild Semiconductor’s Robert Noyce combined a sequence of transistors on a single wafer of a silicon crystal.

This enabled mass production, laying the groundwork for the microprocessor, the computer on a chip, to form in the 1960s. Intel brought it to market in 1971, just before tech giants like Apple and Microsoft were founded to spark a revolution.

The brain

Now, investors realize microchips are the lifeblood of the modern economy, particularly an AI-driven economy.

Nvidia, for example, is the S&P 500’s top performer in 2023:

Last year, lawmakers passed the 2022 CHIPS Act to remake the U.S. into a semiconductor powerhouse, partly to reduce America’s reliance on foreign nations for these tiny chips that power everything from dishwashers to computers to cars.

The law included $39 billion to fund the construction of new and expanded semiconductor facilities. Some chips feature more than 50 billion tiny transistors that are 10,000 times smaller than the width of a human hair.

Tiny but powerful. More important, functional and critical to our modern world. That’s unlikely to change.

“People usually compare the computer to the head of the human being,” said Masayoshi Son, a Japanese billionaire technology entrepreneur. “I would say that hardware is the bone of the head, the skull. The semiconductor is the brain within the head. The software is the wisdom. And data is the knowledge.”

Dive deeper

For more on chips, check out the 2022 bestseller Chip War: The Fight for the World’s Most Critical Technology.