Nvidia results show its growing lead in AI chip race (updated)

Alliancebernstein Holding LP

23/02/2023 15:18

(Updates share movement, updates market valuation)
    By Chavi Mehta
       Feb 23 (Reuters) - As the artificial intelligence boom
takes off, Nvidia Corp  NVDA.O  is expected to emerge as the
biggest - though not the only - winner among chipmakers after
years of focusing on the technology has made it a go-to supplier
for tech firms.
    AI has emerged as a bright spot for investments in the tech
industry, whose slowing growth has led to widespread layoffs and
a cutback on experimental bets.
    The surge in interest helped Nvidia report
better-than-expected quarterly earnings on Wednesday and it
forecast sales above beat Wall Street expectations, in stark
contrast to a projected loss and dividend cut from rival Intel
Corp  INTC.O .    
    Nvidia shares rose nearly 14% to $236.70 on Thursday. They
have jumped more than 60% since the turn of the year, nearly
three times the gain in the Philadelphia Semiconductor Index
 .SOX . 
    The company got its start in the graphics chip business for
PCs by helping video games look more realistic, and then rode
the cryptocurrency wave as its chips were used for mining. Now,
the next push comes from generative AI.
    Nvidia's surge Thursday has boosted its market value by more
than $70 billion. That brings it to more than $580 billion,
about five times that of Intel. It is the seventh-largest
publicly traded U.S. firm.
    The key to the company's success is that it controls about
80% of the market for graphic processing units (GPUs), which are
specialized chips that provide the kind of computing power
required for services such as Microsoft-backed  MSFT.O  OpenAI's
wildly popular ChatGPT chatbot.
    SPECIALIZED CHIPS
    Graphics processing units are designed to handle the
specific kind of math involved in AI computing very efficiently,
while generic central processing units (CPUs) from Intel can
handle a broader range of computing tasks with less efficiency. 
    AI is taking over the tech industry and, according to
research firm Gartner, the share of specialized chips such as
GPUs that are used in data centers is expected to rise to more
than 15% by 2026 from less than 3% in 2020.
    Advanced Micro Devices  AMD.O , whose shares also rose after
Nvidia earnings on Wednesday, is the second-biggest player in
the GPU industry, with a market share of roughly 20%. 
    "The two companies that are leading the AI revolution on the
hardware and processing side are Nvidia and AMD and, in our
opinion, these two companies are head and shoulders above
everybody else," Piper Sandler analyst Harsh Kumar said.
    Lisa Su-led AMD has made big investments in AI in recent
years, including a series of chips designed to compete with
Nvidia's fastest offerings. Intel holds a less than 1% share of
the space. 
    "The enthusiasm around ChatGPT and the potential use case it
unlocks likely represents an inflection point in adoption of
AI," said Lei Qiu, a technology fund portfolio manager at
AllianceBernstein, which has a 0.54% stake in Nvidia.
    "While it is hard to pinpoint exactly how big AI is today as
a percent of (Nvidia's) revenue, it has the potential to grow
exponentially as large tech companies race to develop similar
types of AI applications," Qiu said.
    Nvidia's strength in the AI industry has also attracted the
attention of venture capitalists and startups, which are
investing billions of dollars and promising improvements such as
lower electricity consumption. 
    None of them have so far made a big dent in Nvidia's
business.
    INTEL NO LONGER INSIDE
    All of this is bad news for Intel, which is also shedding
CPU market share to AMD in the data center and personal computer
industries that it once dominated. The company now risks losing
out on the next growth leg of the industry. 
    It has in recent months made efforts to sharpen focus on
GPUs including a move in December to split its graphic chips
unit into two: one focused on personal computers and the other
working on data center and AI.
    Still, analysts say the company has a long way to go before
Intel can make a dent in the market.
    "Intel has more designs it has built to try and penetrate
the (AI) market ... but to date it's seen a disappointing amount
of traction despite its plethora of solutions," Wedbush
Securities analyst Matthew Bryson said. 
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Chipmakers set to reap gains from AI arms race    https://tmsnrt.rs/3YDDxuT
Nvidia's market valuation dwarfs that of Intel, AMD    https://tmsnrt.rs/3EzRHoS
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 (Reporting by Chavi Mehta in Bengaluru and Stephen Nellis in
San Francisco; Editing by Aditya Soni and Anil D'Silva)
 ((Chavi.Mehta@thomsonreuters.com;))