They always say that the best side to be on in a war is on the defensive, but I guess that depends on the size of each team. While aggressive, treating business like a battlefield helps to build strategy as you can treat your company like an army. We’re in the arena just building our defenses, and Nvidia has shown us how it’s done… for now at least.
Hot Streak
I know we’ve had a lot of hype cycles come and go. Between crypto, NFTs, meme stocks, and even that damn floating rock (this one hurt me, it was debunked), it all becomes noise. But one topic I still believe will live up to the hype is AI. I’ve written plenty about it, obviously, I’m a fan. Yesterday, we got some insight into the inner workings of it all through Nvidia’s earnings report.
Nvidia, a recent addition to the Trillion Dollar Club, reported record revenue of $13.51 billion, more than double what was reported last year. The company's strong results were driven by the continued growth of its data center business, with revenue of $10.32 billion, as well as strong growth in its gaming business, with revenue of $3.19 billion. We’ll look into the gaming side of the business in another post, but for now let’s focus on the data center business which is being driven by the increasing demand for AI and machine learning applications, as well as the growth of cloud computing.
Nvidia’s CEO, Jensen Huang, said that the company is seeing "unprecedented demand" for AI and machine learning applications across several industries. He mentioned self-driving cars, healthcare applications like cancer detection and drug discovery, manufacturing (robots?), and financial services to name a few. While you can slap AI on anything these days, Nvidia’s record revenue is a testament to many of these tech companies putting their money where their mouth is and purchasing the hardware actually needed for these projects. But what makes Nvidia so special?
Defenses ready
In business, the term "moat" refers to a company's ability to maintain a competitive advantage, protecting its market share and profitability. The concept comes from the water-filled moats that were used around medieval castles to protect them from invaders. Just as these physical moats prevented enemies from attacking the castle, a metaphorical business moat prevented competitors from attacking a company's market position (we love a good war metaphor).
Nvidia’s moat lies in their chips, which are tailor-made for AI development, and they’re dominating:
While Google, Amazon, Meta, IBM and others have also produced AI chips, Nvidia today accounts for more than 70 percent of A.I. chip sales and holds an even bigger position in training generative AI models, according to the research firm Omdia. - How Nvidia built a competitive moat around AI chips, NYT
The simple strategy is to just ride the AI wave all the way to the bank, which is what they’re doing. However, there are always risks, which brings me to another one of my favorite topics, U.S. foreign policy (trust me, I’m fun at parties).
China
Nvidia’s supply chain. The company relies largely on Taiwan Semiconductor Manufacturing to produce the chips it designs, leaving it susceptible to a slowdown if that company doesn’t expand production rapidly enough. Meanwhile, demand for AI chips has been outstripping supply. In May, Nvidia said it had secured higher supply for the second half of the year.
Comments about China. The U.S. last year placed export controls on advanced AI chips sold to Chinese companies, which Nvidia said at the time could cost it as much as $400 million in quarterly sales. Since then, Nvidia has developed a less-powerful version of its chips for the Chinese market, but the Biden administration is considering further curbs that would prohibit sales of those chips without a government license. China historically makes up about 20% to 25% of Nvidia’s sales of chips for data centers, according to Citi analysts.
Nvidia Earnings Will Gauge Strength of AI Boom, WSJ.
In a recent post, I touched on the supply chain risks lingering over the chip industry. While Nvidia is dominating in the space, they too rely heavily on Taiwan and need to figure out how to lessen that dependency. Luckily they’re strapped with cash and there’s a lot of interest in disseminating the production of semiconductors around the world.
On China, the move to place export controls on advanced AI chips was part of a broader effort by the Biden administration to restrict China's access to technology with military applications. This is a great example to think about the government’s role when it comes to interfering with business. Since the pure capitalistic goal is to just create shareholder value, companies will do business where they find it. There is no incentive to consider the external costs that come with selling advanced AI chips to China, they’re simply buyers of Nvidia. Pair that with the ongoing tensions in Taiwan, and it’s clear to see why the U.S. would feel a certain way. The question is, will this help us in the long run?
One tweeter (Xer?) makes a good point:
They’re questioning if the recent restrictions from the U.S. led to a rush of orders from Chinese manufacturers and if we’ll expect a fall-off in the coming quarters. I guess we’ll have to wait and see.
Thank you
This is such a classic business case that will definitely be studied in business schools across the country. Great company makes a big bet and sees it pay off. They then continue to build out their competitive advantage to capitalize on that initial win. Now they have to protect their business from both competitors as well as governments. It reminds me of how I used to get in trouble for talking too much in class. I’m out here studying hard and building social currency, but the teacher (the authority) is just holding me back. Anyway, as always, if you have any questions, want more explanations, wanna talk about either movie, or strongly disagree, comment below, follow me on Twitter (X), follow me on Threads, or shoot me an email.