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‘The world’s most valuable chipmaker’: How Nvidia saw a 250% surge in revenues amid AI stock rally

Context- Nvidia Corporation, a leading manufacturer of advanced chips for artificial intelligence (AI) applications, saw its shares surge significantly, the most in about nine months, following a strong earnings forecast. This surge has contributed to a ‘FOMO’ AI stock rally, making Nvidia the world’s most valuable chipmaker, surpassing competitors like Intel and AMD.

What happened?

  • In the fourth quarter of 2023, Nvidia’s revenues exceeded $22 billion, a more than 250% increase compared to the previous year, surpassing analysts’ consensus forecast of around $20 billion. The company’s gross margins, a crucial profitability metric, soared to over 700% during the quarter.
  • Nvidia’s CEO, Jensen Huang, stated that “Accelerated computing and generative AI have hit the tipping point,” and that “Demand is surging worldwide across companies, industries, and nations.”
  • According to Bloomberg data, Nvidia’s market capitalization has increased by more than $600 billion this year, bringing its valuation to nearly $1.90 trillion.
  • Analysts at Goldman Sachs had labeled Nvidia as “the most important stock on planet Earth” before the results announcement, reflecting the fact that the company currently controls over 80% of the AI chip market and is likely to maintain its dominant position in the future.
  • The surge in Nvidia’s shares also positively impacted other companies in which Nvidia has invested, such as the American ‘voice AI’ startup SoundHound and the British chip designer Arm, both of which saw their shares rise nearly 5% in trade on Thursday, February 22.
  • Other AI-related stocks, including competitor AMD, which surged over 10%, and Palantir, which rose over 2.5%, also experienced increases. Other chipmakers in the AI race, such as Broadcom and Marvell Tech, also surged, contributing to what analysts are describing as an AI FOMO, or ‘fear-of-missing-out’, rally.

GPU wave

  • Nvidia, a leading manufacturer of graphics processing units (GPUs), is experiencing a surge in demand due to the boom in generative AI.
  • GPUs, which are essential for running calculations for large language models (LLMs) like ChatGPT or Bard, are in high demand but short supply. This is due to Nvidia’s near-monopoly on GPUs and the company’s struggle to keep up with the influx of orders.
  • According to Moody’s Investors Service’s 2024 AI outlook, the adoption of AI will accelerate due to increasing AI spending, model improvement, and edge computing.
  • However, the shortage of high-performance GPUs, crucial for most AI computing, will continue into 2024, although supply is expected to gradually improve.
  • Traditionally, the central processing unit (CPU) has been the key component in computers and servers, with Intel and AMD dominating the market. GPUs, which were initially sold as add-ons to enhance the computing power of CPUs, have become increasingly important due to their superior ability to handle the computational workload required for high-end graphics and AI applications.
  • In fact, most advanced systems used for training generative AI tools now deploy as many as six GPUs for every CPU used, shifting the perception of GPUs from being mere add-ons to CPUs to being essential components. Nvidia, which dominates the global GPU market, is expected to maintain its lead well into the future.

AI wave, data centre demand

  • Nvidia, a front-end player in the semiconductor chips business, has been a key player in shaping the possibilities in graphics since it popularized the term GPU (Graphics Processing Unit) with its GeForce 256 processor in 1999.
  • The company’s GPU chips, such as the new ‘RTX’ range, are now leading the generative AI boom based on Large Language Models (LLMs).
  • Over the past year, Nvidia’s data center business has grown by over 10%, compared to flat growth for AMD’s data center unit and a decline in Intel’s data center business unit. Nvidia’s chips are more expensive than most CPUs on a per-unit basis, resulting in better profit margins.
  • According to Aravind Srinivas, the founder and CEO of Perplexity AI, Nvidia leads the race for AI chips due to its proprietary software that simplifies the use of all GPU hardware features for AI applications.
  • Nvidia is a full-stack solutions company with the systems to support the processors and the software to run them. Nvidia also has a stake in Perplexity, a promising competitor to OpenAI and Google.
  • In addition to manufacturing GPUs, Nvidia offers an Application Programming Interface (API) called CUDA, which allows the creation of parallel programs using GPUs. These programs are deployed in supercomputing sites worldwide.
  • Nvidia also has a presence in the mobile computing market with its Tegra mobile processors for smartphones and tablets, and products for vehicle navigation and entertainment systems.

Entry barriers

  • Nvidia’s resilience in the semiconductor chip industry, a sector with high entry barriers and significant rewards for specialization, serves as a case study. The global industry is dominated by a few countries and companies, with Taiwan and South Korea accounting for about 80% of the global foundry base for chips.
  • ASML, a Netherlands-based firm, is the only company that produces extreme ultraviolet lithography (EUV) devices, which are essential for making advanced chips. Arm, a chip designer based in Cambridge, UK, where Nvidia is a stakeholder, is the world’s largest supplier of chip design elements used in products ranging from smartphones to gaming consoles.
  • The manufacturing ecosystem is nearly closed with high entry barriers, as evidenced by China’s SMIC, a national semiconductor champion that is reportedly struggling to procure advanced chip-making equipment following a US-led blockade.
  • In this market, Nvidia, which dominates the chips used for high-end graphics-based applications, has come to dominate multiple end-use sectors, including gaming, crypto mining, and now AI.

Diversification and business risks

  • Nvidia is releasing a new tool called ‘Chat with RTX’ that allows owners of its latest series of graphic cards to run an AI-powered chatbot offline on a Windows PC. This tool enables users to customize a generative AI model similar to OpenAI’s ChatGPT or Google’s Bard by linking it to files, documents, and notes that they can query.
  • This move comes at a time when OpenAI CEO Sam Altman is seeking significant investments to overhaul the global semiconductor industry due to concerns over the supply-and-demand problem with AI chips, which he believes is limiting OpenAI’s growth.
  • Altman is reportedly in discussions with multiple investors for a project aimed at increasing global chip-building capacity.
  • SoftBank Group CEO Masayoshi Son is also reportedly planning to raise up to $100 billion for a chip venture, codenamed ‘Izanagi’, which will likely supply semiconductors essential for AI.
  • These developments suggest a potential shift in the generative AI discourse and a blurring of the lines between Nvidia and OpenAI, two major players in the AI field, indicating a possible convergence of interests across the hardware-software divide.

Conclusion- Nvidia’s dominance in the AI chip market is a testament to its specialization and innovation in the face of high entry barriers in the semiconductor industry. The company’s GPUs are at the forefront of the AI boom, and its proprietary software and full-stack solutions have positioned it as a leader in the field. However, the demand for these chips has outpaced supply, leading to a global shortage. This has prompted industry leaders to seek significant investments to increase chip-building capacity and diversify risks.

As AI continues to evolve, the lines between hardware and software companies are blurring, indicating a potential convergence of interests and collaboration in the future. The developments in this sector underscore the pivotal role of AI in shaping the future of technology and the global economy.

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