Tech Giants Rely on Nvidia's Advanced AI Chips for Future Growth

Nvidia, a leading force in the technology sector, is experiencing unprecedented growth and recognition as its advanced AI chips become indispensable to industry giants like Google, Microsoft, and OpenAI

by Sededin Dedovic
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Tech Giants Rely on Nvidia's Advanced AI Chips for Future Growth
© Justin Sullivan / Getty Images

At the beginning of last week, the Chief Technology Officer of OpenAI personally thanked Nvidia's CEO Jensen Huang for providing the "most advanced" chips needed to run the demonstration for the company's presentation of its latest AI models.

A day later, at Google's annual developers' conference, Alphabet's CEO Sundar Pichai highlighted his company's "long-standing partnership with Nvidia" and noted that Google Cloud would start using Blackwell graphics processing units (GPUs) from the chip manufacturer in early 2025.

This week, Microsoft, which provides servers for OpenAI, will announce new AI improvements and features developed on Nvidia GPU clusters. The company is hosting its Build conference in Redmond, Washington. Ahead of its quarterly earnings report on Wednesday, Nvidia is at the center of the tech sector, a position that has become increasingly common for the 31-year-old company, whose market capitalization has soared past $2 trillion this year.

Nvidia is expected to report annual revenue growth of over 200% for the third consecutive quarter, with analysts predicting a 243% increase in revenue to $24.6 billion in the first fiscal quarter, according to LSEG. More than $21 billion of this is expected to come from Nvidia's data center, which includes all the advanced processors the company sells to Google, Microsoft, Meta, Amazon, OpenAI, and others.

Nvidia is reaping such profit from its AI product suite that net income is expected to be more than five times higher than the previous year, at $13.9 billion, according to CNBC. Shares have risen 91% since the beginning of this year after more than tripling in 2023.

Dan Niles, founder of Niles Investment Management, compared Nvidia's position in the AI boom to "building the internet" in the 1990s and Cisco's central role during that period. Over three years, Niles said, Cisco experienced several dramatic pullbacks but ultimately rose by 4000% to its peak in 2000.

Nvidia will go through similar cycles, he said. "We're still very early in the building of artificial intelligence," Niles said on CNBC's "Money Matters" on Monday. "I think revenue will increase three to four times from current levels over the next three to four years, and I think the stocks will follow."

Nvidia CEO Jensen Huang delivers a keynote address during the Nvidia GTC Artificial Intelligence Conference at SAP Center on Mar© Justin Sullivan / Getty Images

Google, Amazon, Microsoft, Meta, and Apple will allocate a total of $200 billion in capital expenditures this year, according to Bernstein estimates, with a significant portion of the spending going towards AI-specific infrastructure like Nvidia's chips.

On the other hand, OpenAI relies on Nvidia's technology for its latest chatbot, GPT-4o. In March, Meta announced plans to purchase and build computers that will include 350,000 Nvidia GPUs, costing billions of dollars, and CEO Mark Zuckerberg even swapped jackets with Huang and took photos with Nvidia's CEO.

"If you look at the development of artificial intelligence today, who is actually driving it?" Niles said. "It's the most profitable companies on the planet - it's Microsoft, it's Google, it's Meta, and they're driving this." Before the recent AI boom, Nvidia was known as the primary manufacturer of chips used for 3D gaming.

About a year ago, the chipmaker gave investors the first hint that the company would experience a period of historic growth, signaling to Wall Street that it would achieve about 50% more sales than analysts expected in the quarter ending July 2023.

Growth rates have accelerated since then. However, starting from the second quarter, the expansion is expected to slow down, with analysts predicting significant deceleration in each of the next three periods. "We simply don't know how long this investment cycle lasts and how much excess capacity will be created during that time if this AI thing doesn't materialize as quickly as expected," Bernstein analysts wrote in a note earlier this month.

This doesn't mean Nvidia is in danger of losing a lot of AI chip business to rivals. Piper Sandler analysts expect it to retain at least 75% of the AI accelerator market, even though companies like Google are making their own custom chips.

"We believe the percentage of hyperscaler spending dedicated to computing will further increase in 2024 and 2025," Piper Sandler analyst Harsh Kumar wrote in a note. One issue the company faces is how well the transition to the next generation of AI chips, called Blackwell, whose delivery is expected later this year, is going.

Some worry there might be a lull as clients hold off on buying older Hopper GPUs like the H100 in favor of Blackwell-based chips such as the GH200. "To some extent, the lineup is complete," Morgan Stanley analyst Joseph Moore wrote in a note on Monday.

"Six months ago, short-term expectations were very strong, but there was concern about sustainability. Now, fresh on the back of hyperscalers talking about long-term spending expectations for artificial intelligence, those longer-term views are more positive, but there's concern about a pause leading up to Blackwell."

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