NVIDIA's Rise in the AI Industry
Based in Santa Clara, California, NVIDIA’s story is of humble beginnings. It was founded in 1993 with the vision to provide enhanced graphics, primarily for the video game industry. Yes, video games. In 1999, however, its breakthrough moment was the invention of the graphics processing unit (GPU). The GPU is an electronic chip originally designed to accelerate graphics-intensive applications such as video games and computer-aided design software. In the following years, NVIDIA worked to expand the functionality of the GPU beyond simply generating cutting-edge graphics.
By the 2010s, NVIDIA had improved its GPU technology to provide the speed and power needed to develop and run complex artificial intelligence (AI) and machine learning applications. Today, NVIDIA has become the world’s leading supplier of both AI hardware and software. Its list of customers includes many of the world’s largest tech companies, including Amazon, Alphabet, Meta, Microsoft, Tesla and OpenAI. Collectively, these companies have spent billions of dollars over the past year on NVIDIA’s GPUs for developing and implementing their own AI applications to reduce operating costs or to deliver new products and services to the consumer marketplace.
Experts estimate that NVIDIA currently controls between 80%-95% of the global GPU marketplace. Advanced Micro Devices and Intel are also key producers of GPUs but to a much smaller extent than NVIDIA.
The advancement of GPU technology has created a global rush across companies, industries and nations to develop AI and machine learning applications. According to Bloomberg Intelligence, global spending on AI hardware, software and services is expected to reach $1.3 trillion by 2032, compared to just $40 billion in 2022. This equates to a compound annual growth rate of 42% on AI-related spending.
For its efforts, NVIDIA has been handsomely rewarded. In just a few years’ time, it has quickly grown to become the world’s third largest company. Only Microsoft (No. 1) and Apple (No. 2) are bigger in size. Over the past 12 months, NVIDIA’s revenues and earnings have skyrocketed.
On Wednesday, May 22, NVIDIA reported its latest quarterly financial results. In the first quarter, it reported revenues of $26 billion, up 18% from the fourth quarter and up 262% from the prior year. For the current second quarter, NVIDIA expects revenues to rise to $28 billion. NVIDIA also reported first quarter net income of $14.9 billion, a 21% increase from the fourth quarter and a 628% increase from the prior year. The above results, however, do require some perspective. The global surge in demand for AI technology over the past 12 months has likely skewed NVIDIA’s annual revenue and profit growth rates to extremely high levels. These respective annual growth rates are likely to moderate going forward.
NVIDIA President and CEO Jensen Huang recently regarded AI as “The next industrial revolution.” Whether NVIDIA can stay atop the leaderboard of the global transition to AI is yet to be seen. To quote an old adage, success breeds competition. NVIDIA’s record-setting pace of revenues and profits further stokes the flames of competitors wanting their own piece of the burgeoning GPU industry. That competition comes not only from current rivals Advanced Micro Devices and Intel but also from highly capitalized tech giants seeking to build their own line-up of competing GPUs.
NVIDIA’s dominance of the GPU marketplace also invites the scrutiny of the U.S. government. In recent years, the U.S. Justice Department has sued some of the largest tech companies over monopoly and antitrust concerns. This list includes Apple, Alphabet (Google), Amazon and Meta (Facebook).
The AI industry is still in its relative infancy. Where, and how, NVIDIA navigates the future landscape of AI is unknown. But, to its credit, it has come a long way from simply producing high-quality video games.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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