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The competition is coming for Nvidia

Chipmaker expects to maintain 76% profit margins but enormous margins mean competition is inevitable

Jensen Huang, co-founder and chief executive of Nvidia, notes that its Hopper GPU has 35,000 parts and weighs 70 pounds. Photograph: I-Hwa Cheng/AFP via Getty Images

Proinsias O'Mahony
Tue Feb 27 2024 - 06:00

Soaring profits mean Nvidia’s valuation doesn’t appear elevated, but are those profits sustainable?

Soaring demand saw gross margins hit 76 per cent in the latest quarter. Nvidia expects to maintain these incredible margins this year.

Enormous profit margins mean competition is inevitable. In December, AMD launched a new chip it claims is faster than Nvidia’s. It is spending $5.9 billion annually on research and developments – almost as much as Nvidia. SoftBank founder Masayoshi Son is reportedly seeking $100 billion to fund a chipmaker to rival Nvidia. Meanwhile, Microsoft, Google, Amazon and Meta want to take control of their AI hardware by developing in-house AI chips.

Nevertheless, markets seemingly envisage perpetually elevated profit margins, says Chameleon Global Capital’s Toby Clothier. He estimates Nvidia’s share price requires profit margins of 55 per cent over the next decade.

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[ Nvidia shares jump 13% after sales surge on AI ‘tipping point’ ]

The bullish argument is that Nvidia will remain dominant due to the complex nature of their chips. The Nvidia Hopper GPU has 35,000 parts and weighs 70 pounds, says Nvidia boss Jensen Huang. “These are really complicated things we’ve built. People call it an AI supercomputer for good reason.”

[ Time to stop the doublespeak on artificial intelligence ]

Perhaps, but monopolist-like profit margins mean others will compete, says Vantage Point’s Nick Ferres. “That is how capitalism works,” he says.

Proinsias O'Mahony

Proinsias O'Mahony

Proinsias O’Mahony, a contributor to The Irish Times, writes the weekly Stocktake column

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