Nvidia: The Victor of the AI Race

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Nvidia makes the chips crucial to the training and operating of AI systems because they can carry out the intensive data processing needed. (Image Credit: Reuters)

In a climate where AI’s meteoric potential is being increasingly sought-after, a company has emerged, crushing Wall Street’s expectations and dominating the booming chip industry: Nvidia. In fact, last month, Nvidia joined only 3 other companies worldwide to reach the $2 trillion valuation, surpassing Google and Amazon. Through an array of speculative ventures, strategic partnerships and burgeoning demand, Nvidia has catapulted itself to the forefront of the AI fad.

Nvidia, founded in 1993, is an American company and a leading global manufacturer of Graphics Processing Units (GPUs). It started out targeting the video game market and supplying the GPUs needed to run video games, though pivoted in 2006 when it developed CUDA, a software framework that exponentially expands the computational power of Nvidia’s GPUs. At the time this move was insignificant, but over the past decade, CUDA, in parallel with Nvidia’s GPUs, has become pivotal in developing and training generative AI technology. As demand for AI has soared across industries and governments, Nvidia has positioned itself perfectly to capitalize on this with its early investment in these programs. Today, Nvidia has enormously exceeded rivals like Intel and AMD, and controls 88% of the global GPU market, which has given it significant pricing power – a single Nvidia H100 chip costs well over $30,000.

Moreover, Nvidia has widened its influence to span several sectors by being the main – and the only – suppliers of the GPUs that facilitate the application of AI into a range of systems. For example, OpenAI, the company which produced ChatGPT, used thousands of Nvidia chips in the machine learning process that ‘taught’ ChatGPT. In the electric car industry, Tesla has begun using Nvidia chips in their autonomous vehicles and Meta has recently announced its plan to operate 350,000 Nvidia H100 chips by the end of 2024. Another driver in the rush for Nvidia’s chips is the growth of cryptocurrencies and crypto mining – a virtual process that ensures new coins keep flowing, but not too quickly. This process requires GPUs able to cope with the intensive mathematical algorithms being computed, which are, again, supplied primarily by Nvidia.

However, governments have also begun to integrate AI into their cyber systems and military hardware, in technologies such as autonomous drones and missile defense systems. This has spurred global demand for these chips and exacerbated the supply shortage, which has served in Nvidia’s favor considering these high-end chips are sourced almost exclusively from it. In 2022 alone, China accounted for at least a quarter of Nvidia’s sales. The US, concerned with the chips’ ability to help modernize China’s military, has responded with increasingly harsh export embargoes on the sale of these chips to China to curb their rapid acquisition of them. In retaliation, Beijing is currently preparing a $27 billion chip fund to accelerate the development of domestic chip manufacturing and research capabilities to counter the US campaign aimed at thwarting this.

Investors have also acted on Nvidia’s dramatic growth; its share price has rocketed from $230 to $900 in the past year. This has been encouraged by their unprecedented year-over-year profit growth of almost 800%. Periods of particularly rapid growth for the company have been reflected in its share price, which has historically risen by 5% or more on days when Nvidia releases its quarterly earnings. Last month, Nvidia reported that the last quarter of 2023 marked a 265% growth in revenue from the same period the previous year, which sent its share value up 6% in the following trading day. On the other hand, some have expressed concerns about another dot com bubble crisis, but global spearheads such as J.P. Morgan CEO Jamie Dimon have shot down these concerns, stating, “The internet bubble was hype, AI isn’t.” Yet, Nvidia’s future growth will inevitably be challenged by the onset of new GPU-producing companies seeking to exploit the hot market. In addition, tech giants like Amazon, Microsoft and Google have begun developing their own chips in a bid to lessen their complete dependency on Nvidia. In fact, on Friday, Nvidia’s share price unexpectedly plummeted by 5.5% erasing $128 billion of investors’ cash and sparking concerns over a further drop.

Ultimately, Nvidia has planted itself in an ideal position to exploit the soaring demand for AI capabilities by controlling almost the entire GPU market which AI so heavily relies upon. This, paired with an acute supply shortage and strategic partnerships, has propelled the company onto an unprecedented growth curve which raises the question: will Nvidia continue on this trajectory or is it a bubble yet to pop?

Written by Rakan Pharaon

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