Nvidia: A Milestone, But Not The Destination
Summary
- Nvidia is the leader in a semiconductor device called a graphics processing unit (GPU).
- Training generative AI models require hundreds of these high-end GPUs.
- For the semiconductor industry, AI is going to be a rising tide that can lift many boats.
Justin Sullivan
By Jamie Zakalik
ChatGPT popularity has catalyzed an infrastructure investment cycle that is driving significant demand for Nvidia (NVDA).
When ChatGPT was released to the public on November 30, 2022, few had ever heard of the term "generative AI," let alone interacted with it. Within five days, ChatGPT reached 1 million users, much faster than familiar applications like Instagram (2.5 months) (META), Facebook (10 months), and Netflix (NFLX) (3.5 years). It was clear that this generative AI thing was a big deal. The day ChatGPT was released, Nvidia's market cap was $420 billion. Six months later to the day, Nvidia's market cap catapulted to the $1 trillion mark.1
Nvidia is the leader in a semiconductor device called a graphics processing unit (GPU), which they are credited with inventing in 1999 to be used for gaming graphics computation. Since then, GPUs have found use in a broader set of applications including autonomous driving, cryptocurrency mining, and artificial intelligence.
Nvidia is the first semiconductor company to reach this $1 trillion valuation milestone, and its current market cap is larger than the next five largest revenue semiconductor companies combined. But Nvidia is not your typical semiconductor company. The average selling price across all semiconductor devices last year was 52 cents, per Semiconductor Industry Association data. Nvidia, on the other hand, sells its latest generation data center GPUs for over $20,000. This pricing power comes from decades of investment, not just in hardware, but in their software and user ecosystem.
Training generative AI models require hundreds of these high-end GPUs. We believe this is driving a significant upside to Nvidia's outlook - specifically >50% upside to their July quarter sales guidance with Nvidia expecting data center sales to significantly increase in the next quarter.2
This spending increase also sets AI apart from past hype cycles - companies like Apple (AAPL), Google (GOOG), Amazon (AMZN), and Microsoft (MSFT) are applying billions of dollars towards AI infrastructure - something that CIOs, even of trillion-dollar companies, don't take lightly. A large addressable opportunity like AI processing will undoubtedly in our view attract competition for Nvidia from other merchant solutions and or customized chips for cloud customers in partnership with other chip companies.
However, for the semiconductor industry, AI is going to be a rising tide that can lift many boats. Regardless of what ends up becoming the next killer AI application, semiconductors benefit as the critical building blocks of back-end infrastructure. This is why $1 trillion for Nvidia is a milestone for the industry, but not the destination.
Source: (1) FactSet; (2) Nvidia
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