US chipmaker Nvidia strikes AI gold

Semiconductors already occupy a pivotal place at the center of the global economy, but the rise of artificial intelligence is cementing it. The latest indicator was the stunning financial report posted by Nvidia, a world-leading chipmaker, on August 24.

Shares in the Silicon Valley company hit an all-time high, after its revenue doubled year-on-year in the second quarter of 2023 to $13.5 billion (€12.5 billion), smashing analyst expectations.

The reason for Nvidia's boom? The firm specializes in the kinds of chips needed for various forms of artificial intelligence technology. Nvidia's stunning success is directly tied to the artificial intelligence craze that has gripped the tech world ever since the launch of ChatGPT, a chatbot, last November.

Market analysts have said Nvidia is "uniquely positioned" to capitalize. "Its chips are distinctively capable of performing in ways that allow AI models to be trained using them," Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, told DW.

Financial commentator Susannah Streeter agrees. "Being an early beneficiary of a megatrend is an enviable and rare opportunity, and Nvidia has a front seat on the AI juggernaut," she told DW.

AI's 'iPhone moment'

Although artificial intelligence has been around for many decades, the sudden and profound impact of ChatGPT dramatically changed the dynamic, according to Nvidia's CEO and co-founder Jensen Huang.

Huang said earlier this year that artificial intelligence was "having its iPhone moment," referring to how Apple's iPhone transformed the tech sector.

"I think we were all surprised by how effective ChatGPT was in both its ease of use as well as incredible capability," he said at an Nvidia developer conference in March. "Almost immediately after the ripples of ChatGPT around the world, cloud service providers and software vendors in all these different industries started to ask the question, what does it mean to them?"

For Nvidia, it means mega business. Since the start of 2023, the company's share price has increased by around 220%. It now has a market capitalization of more than $1 trillion.

Lund-Yates said the company was already performing "streets away" from expectations and pointed to the huge, increasing demand for Nvidia's products as an indication that its rise is going to continue. "Nvidia's H100 chip, where demand is far outpacing supply, is currently selling for double its original price in the tens of thousands," she said.

Founded in 1993, Nvidia is far from an overnight success. For much of its history it was focused on video games. It developed a reputation for building graphic cards that could produce ever more advanced and stylish computer game graphics.

"Their original use for graphics on video games was repurposed for AI at an early stage in the demand boom, and that's a very tough situation to replicate for other firms," said Lund-Yates.

Over the past 15 years, Nvidia has become the main provider of high-performance chips for artificial intelligence. It now holds around 80% of the global market for such chips.

It has also invested in two areas that are key to artificial intelligence: advanced networking and software. Advanced networking allows chips to be used in multiple ways at once while CUDA, Nvidia's AI software platform, has proven popular.

Big beasts loom

Nvidia's gold-plated place at the top of the artificial intelligence tree means it is likely to continue to benefit from the surge in interest in the sector.

"Companies don't want to be left behind in the AI revolution, and even though times are tighter, they are ring-fencing budgets to invest in future AI capabilities, even though the full possibilities of the tech is still hard to map," said Streeter, who expects demand for Nvidia's products to grow and grow.

Although it remains far from clear how the current wave of interest in artificial intelligence will ultimately develop, other companies are keen to cash in as well. Semiconductor designers and makers are the most obvious potential beneficiaries of a sustained boom.

Earlier this month, semiconductor firm AMD announced it was planning to release its own artificial intelligence chips, known as MI300, by the end of 2023. The chips are designed to compete with Nvidia's H100 chips.

Then there are several smaller players such as Cerebras and SambaNova who are hoping to develop the next big thing in artificial intelligence chip technology.

It's certainly not just smaller startups who are hoping to get a slice of the pie currently being enjoyed by Nvidia. Tech behemoths Google, Amazon and Microsoft are all racing to develop their own artificial intelligence chips.

This week, Google announced a slew of new artificial intelligence investments, including details of its own new custom-built chips.

Earlier this year, US media reports said Microsoft was working on its own AI chips to avoid being too reliant on Nvidia. Internal Microsoft documents, released during a Federal Trade Commission lawsuit against the firm in 2022, said Microsoft was working on a "first-class silicon chip to underpin our cloud and AI efforts."

Meanwhile, Amazon has made no secret of its attempts to develop AI chips. "I think that we're in a better position than anybody else on Earth to supply the capacity that our customers collectively are going to want," Amazon Web Services CEO Adam Selipsky told CNBC in June.

"There is the potential for others to catch up and gain a big slice of the market," said Streeter.

She also pointed to other potential challenges, such as huge demand putting a strain on Nvidia's supply chains. That, as well as the intense rivalry between the US and China on semiconductors, could lead to some volatility in the years ahead.

For now though, Nvidia is better placed than any other firm to ride the wave.

Edited by: Ashutosh Pandey