The Business Of

Semiconductors | Nvidia | Outlook

Morning All!

Fri-yay! The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of Nvidia. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about Nvidia this week.

• How Do They Make Money: Whilst Nvidia are known for their graphics cards. They don’t actually sell many graphics cards. They sell their GPUs to the graphics card manufacturers. Who then sell the cards to gamers.

• What Are Their Margins: In 2022, Nvidia’s EBIT margin was 37%. But in 2023, this had dropped to 16%. And this drop highlighted the cyclicality of the semiconductor industry.

• What Do They Do With Their Profits: Unlike Netflix who reinvest their cash. Or Ninety One who return their cash. Nvidia have been happy piling up cash on their balance sheet. In 2022 the company has $21bn on their balance sheet!

With strong revenue growth, high margins and brilliant cash generation. It’s fair to say that things are looking pretty good for Nvidia. However, before we close for the week, let’s quickly touch on some of the less rosy parts for the business. And what potential risks may lay ahead for the semiconductor giant. So without further ado…

Beware: New Entrants

Okay, so as we’ve seen this week, Nvidia holds a gigantic share of the AI GPU market. However, when a company has such high market share in an evolving space, one thing is guaranteed. New entrants to the industry. And semiconductor experts believe one entrant in particular could pose a significant threat to Nvidia’s dominant market share…

That company is Cerebras. Founded recently in 2015, the US-company was set up (by 5 AMD engineers) specifically to accelerate AI computing. And Cerebras takes a very unique approach to solving AI challenges. In the screenshot below, you can see what a Cerebras chip (on the left) looks like vs a Nvidia one (on the right). Notice anything different?

Yes, the Cerebras chip is massive! In fact, the surface area of the chip is 56x greater than the surface area of Nvidia’s largest chip. And it is the world’s first ever chip with over a trillion transistors on it. ~50x more than Nvidia’s highest!

Now, some of you may be thinking - surely those chips (the size of dinner plates) are too big to fit into phones and laptops? And yes, you’d be right. But remember, these chips aren’t meant to fit into phones and laptops. They’re created to fit into the supercomputers we saw Microsoft, Tesla and other corporations need for their AI training.

So, if the Cerebras chip has more transistors on it than Nvidia’s GPU chips. Does that mean their chip will allow clients to do things quicker? Well, the early signs do seem to indicate that the Cerebras chip is a lot quicker than current GPUs. Some Cerebras customers have testified that using the Cerebras chip has helped them train large models in days rather than weeks. And the company has been breaking records for the the largest AI models every trained on one device…

Okay, so the million dollar question. Sorry, billion dollar question. Will Nvidia lose customers to Cerebras? Well, that is most definitely a possibility. The startup already boasts some high profile customers - mainly in the healthcare space. Including GSK, AbbVie and AstraZeneca. And a few education institutions too including the University of Edinburgh - shoutout to any Edinburgh students reading this! And as Cerebras grows recognition and further improves their computing speed, we could see them erode Nvidia’s market share in the AI GPU space.

We won’t go into depth about the other promising startup in this space. But over in Bristol, a company called Graphcore are also doing their best to eat into Nvidia’s market share. And they’ve already got customers like Microsoft and BMW on their side! So whilst Nvidia’s current market share is a handsome >90% in this space. And growth for their datacenter segment has been >60% CAGR for the last decade. Things may be changing…

Beware: Going In-House…

So, that’s clear. One threat to Nvidia is new companies like Cerebras and Graphcore coming up with better, quicker solutions than Nvidia’s GPUs. If this were the case, Nvidia may lose some of their big customers like Facebook, Microsoft, Amazon and Tesla. And as we saw on Tuesday, these contracts are huge. For instance, Microsoft spent ~$100m on Nvidia GPUs to build their AI supercomputer. Nvidia made $100m from just one client!

However, what if I told you that there’s a very real possibility that Nvidia could lose Facebook, Microsoft, Amazon and Tesla. But these customers may not go to Cerebras or Graphcore either…

Wait, so where would they go? Well, something we’re hearing a lot more of these days is that these big enterprises are deciding to create their own chips. Instead of having to buy chips from Nvidia, Intel and AMD, many of these firms are deciding to move chip production in-house.

Facebook, Amazon and Tesla are all currently developing their own chips. And Google and Apple have been using their own chips for quite a long time. Amazon have actually said that AWS will be much more effective for customers if they used Amazon’s chips rather than Nvidia’s. However, Nvidia isn’t too concerned. At least their CEO doesn’t seem to be too concerned a few years ago...

Back in 2019, when he was asked about Nvidia’s customers building their own chips. Nvidia’s CEO said that only Google was in a position to build silicon chips at scale. And that their other big customers, including Amazon, Facebook, Tesla, etc. would still need Nvidia’s chips for their AI work.

How confidently he’d say that now is up for debate. Whilst training huge AI models costs an awful lot of money… Amazon, Facebook, Tesla, etc. all have deep pockets! And if AI is central to their business models. The worse case scenario for Nvidia is that these companies all decide to bring chip production in-house over the next decade. Meaning Nvidia loses their largest customers…

And That Is That!

So that brings us to the end of The Business Of Semiconductors: Part 1. We hope you enjoyed understanding The Business Of Nvidia. Although we went through some of the potential speed bumps in the coming years in today’s newsletter. It’s fairly safe to say that Nvidia is still in an incredibly strong position. To go back and read any of the previous newsletters from Monday-Thursday, you can find them here. You can also find newsletters for Tesco, Deliveroo, Man United, Ninety One, LVMH, Cineworld, Netflix and Disney there too!

Now, usually, we’d be sending out a second email today with a Career Talk. But unfortunately, the person who was due to chat this week wasn’t able to make it…

However, to make it up to everyone - I’m going to produce not one, but two fantastic Career Talk episodes next week. With two phenomenal ladies doing very well in the world of consulting (one from McKinsey) ready to share their journeys with you!

5th May 2023

Nigel Jacob CFA