Nvidia: The next Tesla or the cementation as the next technology Titan?
For my first article, I have chosen to write about a company which is in the headlines for about a year… Nvidia. Yes, the chip giant that took the world by storm in 2023 with their graphics processing units (GPUs) which can help to power and process the needed computational power needed to power specific Large Language Models or LLMs like ChatGPT, Gemini, and LLama. In March of 2023, it launched its H100 Tensor Core GPU, which is the most powerful GPU for AI. The soft launch of OpenAI’s ChatGPT in November of 2022 created a stir in the market. This leading innovation caused Nvidia to increase over 1100% from its October 2022 lows to reach a market capitalization of $3.038 T (according to companiesmarketcap.com on 30/6/2024) which makes it the third-largest company by market capitalization in less than 2 years.
With such exponential growth, I believe that many who experienced the Dot Com bubble might compare Nvidia to Tesla’s dwindling while others remain very optimistic about the future of Nvidia. Firstly, let’s explore what is Nvidia’s business about.
What is Nvidia?
The simplest answer: Nvidia is just a semiconductor company that makes chips to power your devices.
The more complicated answer is: Nvidia is a fabless semiconductor company that essentially designs, markets, and sells hardware while outsourcing the fabrication or making of their hardware to a foundry. A foundry like TSMC or Taiwan Semiconductor Manufacturing Company will help to manufacture the hardware from raw materials to the output for a price. You can reference the different types of manufacturing companies below. ( IDMs or Integrated Device Management are essentially just a mix of both foundries and fabless companies)
Hence, essentially Nvidia’s entire business model is based on continuous innovation of its GPUs mainly for gaming and AI use so that it can attract continuous orders from businesses. Now the keyword here is Continuous Innovation.
For some history into Nvidia, in a March 2023 CNBC interview with Jenson Huang, he describes the entire journey of how Chris Malachowsky, Curtis Priem, and Jenson himself embarked on the journey to start Nvidia. It detailed Jenson’s ambitious visions that he has for the company like embarking into Artificial Intelligence with the start of CUDA which is a parallel computing platform and programming model developed by Nvidia. Then, not many companies were working on AI and this made Nvidia one of the pioneers to invest in researching chips for AI development. However, it did not pay off until recently when OpenAI showed the world the power of AI.
While I greatly admire Jenson’s steadfast determination to his vision, this reminds me of Elon Musk’s vision of sustainable transportation and helping in the climate change efforts when he started Tesla. Tesla increased more than 2800% from 2019 to 2021( See picture below).
However, Tesla dropped due to market conditions and competition in the EV space especially by Chinese companies which impacted Tesla’s bottom line. Hence, its mainly a competition issue. Now, let’s move on to address the issue with Nvidia.
Key Issues with Nvidia ( from my perspective) :
- Geopolitical issues
- Competition
- Innovation
Geopolitical Issues
As stated at the start of this post, Nvidia works under the Fabless ‘model’ hence it does not produce the GPUs that it designs. Instead, they contract it to TSMC to make the chips. With the current tensions between Taiwan and China( a strong competitor with the US ), the TSMC factories in Taiwan are at risk due to the tensions between China and Taiwan and they are the main and critical locations for the production of chips. Thus, this is the bottleneck of many Fabless companies like Nvidia (as most of the world relies on TSMC for the production of chips). This vulnerability can potentially cause not only Nvidia but also in general the chip industry to lose billions of dollars worth of sales which will heavily impact its earnings and its stock price. Hence, the US government gave TSMC 20Bn to build advanced chips in the US ( Arizona ) under the CHIPS Act. This is to prevent such risks from happening but I (personally) believe that such efforts will need much more investments and more time for them to move a substantial part of their manufacturing into the US, especially with the added issues like hiring skilled workers and increased costs.
Competition issue
With the rise of Nvidia, many chip companies like Intel and AMD are starting to pump in money to build a more advanced chip. According to a Yahoo article, Intel is currently building a Gaudi3 AI accelerator and AMD released MI300 accelerator. Both of these new chips are said to be able to compete with Nvidia’s chips. 15 years ago, Nvidia started to invest in this field which gave them an edge over their competitors but such a gap can be closed. In my eyes, the entire chip industry is like an overcrowded pond with each shark vying for a piece of their prey which I feel is very similiar to the EV industry. This leads me to my last issue.
Innovation
Continuous innovation drives profitability in the tech sector. Nvidia must innovate swiftly to maintain leadership in the chip industry or risk losing ground to competitors like AMD and Intel which will be detrimental for the business. Huang’s vision is something that enabled him to springboard Nvidia to a trillion dollar company, yet Nvidia’s ability to maintain that valuation and growth lies in how fast it innovates to meet the needs of the market.
Tesla’s market share
Now, let’s look at the following statics.
According to the charts ( and captions) above, in 2020–2022 when it was near Tesla’s peak, Tesla’s market share ranged from 65% to 79% in the US which is significantly more than half of the total market. However, Tesla’s dominance is diminishing with each year, and recent estimates it will reach 20% in 2025. This is attributed mainly due to competition and from other car companies like Chevrolet. According to stats by Market Watch, Tesla’s market share in 2023 dropped to 56.3%. At this rate, it can potentially drop below 50% by 2025
A look back at Nvidia
Nvidia managed to springboard to the first due to their early innovation and research which allowed them to clinched an 80% market share in 2023 ( Q4). However, from Q4 2022 to Q4 2023, their market share declined by 2–4% per quarter, and instead, AMD market’s share increased. This decrease is very similar to the decrease in Tesla’s market share but time will tell if it will continuously spiral downward or if can Nvidia maintain its market share at a stable level. Looking at recent developments like Amazon cutting its Nvidia’s orders due to the anticipated release of the new GPUs, it is clear that Nvidia needs to continuously innovate.
Conclusion
To end it off, it is unclear if Nvidia will meet the same fate as Tesla but one key thing I will be looking out for is the pace of innovation and how Nvidia manages their competitors by profit margins and market share of Nvidia in the GPU space. These key metrics are useful to identify the dominance of Nvidia which is key when evaluating the company. For now, I’ll watch on the sidelines to see how this plays out.
Thanks for reading my blog post. All things written in my blog post and in my blog is not financial advise and all written are my opinions towards a topic which after reading, I hope readers can learn something or gather a new opinion about a certain topic. If there are any feedback do comment or drop me a DM. Thank you !
