Nvidia is in a good position
Nvidia’s incredible revenue growth is being driven largely by a handful of companies like Amazon and Microsoft that operate “hyperscale” data centers (or “hyperscalers”) — really, really, really big server farms. The companies are upgrading and expanding them in order to keep up with the massive and specialized computing resources demanded by AI. Nvidia’s superchips power them. Yes, there are other players, but Nvidia dominates the market.
The good news for Nvidia? This firehose of cash doesn’t seem likely to be shut off any time soon. During recent earnings calls, CEOs from the companies that run these hyperscalers reiterated the need to continue — and even expand — AI-focused capital expenditures (capex). Alphabet spent roughly $31 billion on capex in 2023. This year, that figure could reach $50 billion — a colossal increase. And Alphabet isn’t alone.
Alphabet’s CEO, Sundar Pichai, summed up big tech’s attitude toward these investments like this: “The risk of underinvesting is dramatically greater than the risk of overinvesting for us here.” This messaging was echoed by almost every CEO leading a hyperscaler. Nvidia is likely to enjoy substantial cash inflows for the foreseeable future. Of course, it will need to fend off competitors, but it is well positioned to do so.
Now, that’s business as usual. What’s Nvidia’s next big move?
Spotlight on networking
Data centers are incredibly complex, especially those built for AI. At the heart of these systems are the chips that perform the computations. This is the market Nvidia dominates. However, all this high-powered computing creates massive amounts of data, and that data needs to be transported. This is where networking infrastructure comes in.
The standard for networking in most data centers has been ethernet, but the demands of AI computing are too great for the technology. Companies needed to retrofit their data centers with a different networking technology like InfiniBand to keep up. This is extremely costly, but Nvidia has an answer. It recently released its Spectrum-X platform, which allows data centers to remain ethernet-based and run advanced AI. This represents a large new revenue stream for the company.
Last quarter, Nvidia made close to $20 billion from its chips and $3 billion for its networking products. Mordor Intelligence estimates that the total market for data center networking infrastructure is about $26 billion in 2024 and it forecasts the space to grow at an 18% compound annual growth rate (CAGR) through 2029. There is significant room to grow in this arena.
There is competition, however. Broadcom is already a major player. Nvidia is unlikely to dominate this space as it has with the chip market. However, this new ethernet-based approach could be a game changer. A bigger share of the market is very possible.
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