2023 has been a year of success for Nvidia, the dominant manufacturer of high-end GPUs and other tech components. The company has gained enormous traction, with the surging demand for its artificial intelligence chips pushing its valuation over the $1 trillion mark, mimicking the likes of tech giants such as Apple and Microsoft. Furthermore, Nvidia’s share price has skyrocketed, surging 206% since the start of the year. But has Nvidia flown too close to the sun? And will recent challenges in the industry threaten its lucrative monopoly?
The first challenge that Nvidia faces is the growing competition within the AI processor scene, with firms ranging from tech giants to blossoming entrepreneurs wanting to take a slice of the industry for themselves. Microsoft poses the largest threat to the firm, recently announcing the development of bespoke chips at their annual Ignite conference. These chips, which feature a specialised AI accelerator named ‘Maia’ are designed to function most effectively with the company’s language model GPT. This will undermine Nvidia’s relationship with the tool Chat GPT, which currently utilises over 20000 Nvidia chips, as Microsoft’s special investment relationship with the parent company, Open AI, will potentially lead to a substitution in processor choice. Outside of Microsoft, Nvidia has also faced continued threats from other manufacturers like AMD, who unveiled a new AI GPU to directly weaken Nvidia’s dominance.
The second challenge which Nvidia will face in the coming years is the movement of firms to internally produced processors. The biggest customers of Nvidia’s AI computing chips are Meta and Amazon who use them for their cloud-computing services. For these companies, cost-cutting is essential as they attempt to increase efficiency and drive profits. Will their solutions involve the continued use of Nvidia’s chips or will it involve producing an in-house alternative?
The final hurdle to Nvidia’s continued success in 2024 is the reckoning of US regulations. The USA has banned the export of high-power AI processing units to rival countries, such as China and Iran, in the interests of national security. These regulations have been consistently tightened and updated, with the latest edition blocking Nvidia’s redesigned A800 and H800 chips which had intentionally slower interconnection speeds to circumvent the restrictions. This development is a key threat to Nvidia’s large Chinese customer base, with over a quarter of its 2022 revenue coming from China.
Nevertheless, analysts still expect a median 28.04% increase in the stock price across the next 12 months with Nvidia believing that increased regulations will lack a “near-term meaningful impact” on financial results. The competitive and regulatory challenges that Nvidia faces are primarily long-term, stretching into late 2024 and 2025, and are hardly significant enough to cast doubt on the company’s exceptional 2023 performance. Thus, for the time being, Nvidia will continue to enjoy the luxury of being the most prevalent AI processor supplier.