In June, Nvidia briefly overtook Microsoft and Apple to become the world’s most valuable company.
There’s a simple reason: there’s a war going on in AI — and Nvidia is the only arms dealer. By some measurements, Nvidia controls over 80% market share for AI chips.
Nvidia’s rise is hard to comprehend. Two years ago, it was valued at $400 billion. A year ago, it jumped to $1 trillion. Today, it’s grown to over $2.8 trillion. That’s a 7x increase!
A lot has happened since we wrote about Nvidia last year.
That’s why we’ve decided to distill the essential insights every investor needs to know. We’ll cover Nvidia’s current market dominance, the risks and opportunities ahead for the stock.
This article was written by a Financial Horse Contributor.
Nvidia’s Revenue, Visualised
Nvidia announced revenue of $26 billion in its most recent quarter — a 262% jump year-on-year.
Nvidia’s data centre business was the key revenue driver, with a staggering 427% year-over-year revenue growth, accounting for over 85% of total sales. Five years ago, the figure was only 25%.
Today, Nvidia is valued more than Meta, Tesla, Netflix, AMD, Intel, and IBM — combined.
Is Nvidia’s valuation justified? It depends on your outlook about their future.
Despite similar valuations, Apple’s revenue is 4.8x higher than Nvidia’s, while Microsoft’s revenue is 2.8x higher than Nvidia’s.
Nvidia stands out where its gross margin is concerned, with 78.4% compared to 46.6% for Apple and 70.1% for Microsoft. While Nvidia’s revenue growth is skyrocketing, Apple experienced a 1% decline and Microsoft grew 14%.
Nvidia anticipates another 100%+ revenue surge in the current quarter. So, if they can maintain their momentum, their valuation may be justified.
Investors are betting on CEO Jensen Huang’s vision for the “next industrial revolution” to materialise. It’s a vision where Nvidia partners with companies and countries to build new data centers, called AI factories, which will be equipped with their next-generation chips.
Nvidia’s Competitive Advantages: Factors Fuelling Growth
You don’t get to 78.4% gross margin and 208% revenue growth without having a wide moat.
Nvidia has practically no direct competitors. Its tight hardware and software integration creates several powerful competitive advantages through scale and network economies.
Nvidia has a formidable competitive advantage, coupled with the visionary leadership of CEO Jensen Huang, who has guided the company with unwavering intensity and long-term vision since its founding 31 years ago.
Nvidia’s Moat #1: The Hardware
It begins with the chip. Nvidia invented the category of a graphics processing unit (GPU) when everyone else was building central processing units (CPUs). We explain in more detail in our previous article, but the New Yorker summarises it well:
“Unlike general-purpose C.P.U.s, the G.P.U. breaks complex mathematical tasks apart into small calculations, then processes them all at once, in a method known as parallel computing. A C.P.U. functions like a delivery truck, dropping off one package at a time; a G.P.U. is more like a fleet of motorcycles spreading across a city.”
Nvidia continues to lead in cutting-edge chip technology, with huge investments in GPU development. Even as the market leader, Nvidia is accelerating its pace of innovation. It used to release a new chip architecture every two year, but now committed to a release every year.
Its latest offering, Blackwell, boasts a 2.5x performance boost and 3-4x energy efficiency compared to the previous year’s version. This results in significant cost savings for customers.
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Nvidia’s Moat #2: Ecosystem and Developer Network Economies
Nvidia’s CUDA platform, introduced in 2007, has become the de facto standard for GPU computing.
“What Nvidia does for a living is not [just] build the chip: we build an entire supercomputer, from the chip to the system to the interconnects… but very importantly the software,” said Huang at its annual GTC Conference in March.
Nvidia made a massive bet on CUDA to build up its installation and developer base. Today, any competitor that wants to displace Nvidia will need to be 10x better to overcome the switching costs of a new platform. This has proven to be incredibly difficult.
Jensen himself explained it best at the Computex 2024 Keynote address, when he said CUDA had achieved a “virtuous cycle”.
Creating a new platform is extremely hard because it’s a chicken-and-egg problem. If there are no developers that use your platform, then of course there will be no users. But if there are no users, there is no installed base. If there is no installed base, developers aren’t interested in it.
Developers want to write software for a large install base, but a large install base requires a lot of applications so that users would create an install base. This chicken-and-egg problem has rarely been broken, and it’s taken us 20 years.
One domain library after another, one acceleration library after another. And now we have 5 million developers around the world. We serve every single industry from health care, financial services, of course, the computer industry, to the automotive industry. Just about every major industry in the world, just about every field of science, because there are so many customers for our architecture, OEMs and cloud service providers are interested in building our systems. System makers, amazing system makers like the ones here in Taiwan, are interested in building our systems, which then offers more systems to the market, which of course creates greater opportunity for us…to increase our R&D scale which speeds up the application even more.
Nvidia’s Moat #3: Jensen Huang
It’s impossible to separate Nvidia’s success from Jensen Huang, who has led the company since its founding 31 years ago. The New Yorker has a fantastic profile on him.
The article describes Nvidia’s intense culture. For example, Huang believes that “failure must be shared”. Product failures are present to hundreds of people, where every poor decision is dissected openly. This quickly weeds out people who get defensive easily. The New Yorker article continues:
Huang communicates to his staff by writing hundreds of e-mails per day, often only a few words long. One executive compared the e-mails to haiku, another to ransom notes.
Huang has also developed a set of management aphorisms that he refers to regularly. When scheduling, Huang asks employees to consider “the speed of light.” This does not simply mean to move quickly; rather, employees are to consider the absolute fastest a task could conceivably be accomplished, then work backward toward an achievable goal. They are also encouraged to pursue the “zero-billion-dollar market.” This refers to exploratory products, such as CUDA, which not only do not have competitors but don’t even have obvious customers.
Having Huang at the helm ensures Nvidia takes a long-term view of the business — thinking in five-year horizons rather than the next quarter. This allows the business to focus on long-term and bold bets like CUDA, even if it may puzzle analysts and anger shareholders in the short run.
Nvidia’s Next Big Bet: Omniverse
While Nvidia’s current success is largely driven by its AI chips and software ecosystem, CEO Jensen Huang has his eyes set on the next big bet: Omniverse.
Omniverse is Nvidia’s ambitious attempt to simulate the real world with an extraordinary level of detail. Huang describes it as an “industrial metaverse.” The goal is to create photorealistic, 3D worlds that can be used for a variety of applications.
At the heart of Omniverse is Nvidia’s ray-tracing technology, spun out of its roots making graphics for video games. Ray-tracing simulates the way light bounces off objects, enabling the creation of stunningly realistic visuals.
Huang’s vision is to unify computer graphics research with its generative AI capabilities. The idea is that advanced image-generative AI will soon be able to render inhabitable 3D worlds populated with realistic people. Combining that with language-processing AI that can interpret voice commands, users could “speak whole universes into existence”.
The applications are vast. These “digital twins” of our world could be used to safely train robots and self-driving cars. Omniverse could allow users to inhabit personalised realities.
While still in its early stages, Omniverse represents Nvidia’s next bold bet. Just as CUDA was once considered a “zero-billion dollar market,” Omniverse is a forward-looking investment. If successful, it could cement Nvidia’s position as a leader not just in AI hardware and software, but in the creation of immersive digital worlds.
Omniverse is a reminder for investors that Nvidia isn’t resting on its laurels. There’s no guarantee the investment will pay off, but it shows how Nvidia continues to innovate and position itself for the next wave of technological disruption.
Who are Nvidia’s Competitors?
Nvidia’s moat has formidable defenses, but competition has intensified as they realise the size of the market opportunity. Any cracks in the moat will eat away at Nvidia’s margin over time.
In 2023, venture capitalists poured $6 billion into AI semiconductor companies to fund the next Nvidia. Startups like Cerebras are developing specialised AI chips that could challenge Nvidia’s offerings.
AMD and Intel are also investing heavily in AI hardware. Nvidia’s own customers, like Google and Amazon, are developing in-house AI chips to reduce their reliance on Nvidia.
On the software front, a big industry group called the UXL foundation, which includes Google, AMD and Intel, is working to create free alternatives to Nvidia’s CUDA for controlling hardware for AI applications.
Apple and Qualcomm are also emerging as potential rivals in the AI chip space. Apple’s recent moves at this year’s WWDC showcase how Apple’s version of generative AI will primarily run on its devices rather than in the cloud. Known as “edge computing,” this will reduce reliance on centralised cloud data centres — the kind Nvidia chips power.
Conclusion
As we’ve seen, Nvidia’s rise to become one of the world’s most valuable company is a testament to its position at the very top of the AI hierarchy. With its powerful combination of cutting-edge hardware, robust software ecosystem, and visionary leadership, Nvidia has built a moat that will be difficult for any competitor to cross.
But Nvidia’s story is far from over. As the company doubles down on bold new bets like Omniverse, it’s clear that Jensen Huang’s ambitions extend far beyond the realm of AI chips. He envisions a future where Nvidia’s technology powers not just the next generation of AI, but the creation of entirely new digital worlds.