Nvidia – Bringing on the Competition

Nvidia, the AI chip designer, has had a surge in its share price since the beginning of the year. The company’s share price has increased just over 230% since the beginning of the year. It has been the poster company for investors trying to jump in on the Artificial Intelligence (AI) wave, that has dominated news cycles and conversations over the past year.

Nvidia is renowned for developing the first commercially accessible graphics processing unit (GPU) in 1999. The GPU distinguishes itself from the central processing unit (CPU) by completing less intricate tasks but can do these tasks concurrently. The CPU, on the other hand, can handle more complex tasks but does them sequentially. GPUs have a wide variety of uses such as:

• Creating visuals for displays on computers
• Facilitating the computations essential for cryptocurrency mining
• Contributing to the training of large language models in data centres

Microsoft, Amazon, and Alphabet, owners of the world’s three largest cloud services providers, have been acquiring Nvidia’s premium GPUs for advancing the next phases of AI application development. These high-end chips come at a substantial cost, with Nvidia’s flagship H100 chip priced at approximately $30,000 each. In Q3 2024, Nvidia gross margin reached 74%: a significant increase from the 56% recorded during Q3 2023. The quarter’s revenues soared to $18 billion, marking a remarkable growth of over 200% compared to the same period last year. Furthermore, Nvidia’s net income reached $9 billion for the quarter, indicating a 1200% increase compared to the same quarter last year.

The substantial costs associated with Nvidia’s high-end GPUs have prompted Microsoft, Amazon, and Alphabet to seek alternatives. Consequently, these tech giants have either already crafted their own chips or are in the process of developing such solutions for use in their data centres. Backed by substantial capital reserves, these companies are investing in chip development endeavours aimed at narrowing the performance gap with Nvidia’s offerings. Nvidia is not stepping back though. The company claims that its upcoming flagship H200, slated for release next year, boasts nearly double the capacity of its predecessor, the H100 GPU.

The competition is further intensifying as traditional semiconductor companies globally vie to capitalize on the AI trend. The race is notably heightened by the US ban on exporting high-performing chips to China, serving as a catalyst for Chinese companies to bolster their presence in the AI chip market. The race is on. As it stands, Nvidia is in the lead but there are many other factors that could favour other winners.

Nvidia, Microsoft, and Amazon are held in the Lunar BCI Worldwide Flexible fund. They are also held by Lunar Capital’s Offshore Portfolio clients.