To emphasise the centrality of Nvidia’s products to generative AI, Chris equates its chips to oil. “You cannot get the AI boom to work without Nvidia’s products”, he says. Every company wants in on their tech, and it’s theirs if they cough up anywhere between $30,000 to $40,000 per AI chip. And companies are more than happy to fork out those sums – Nvidia announced record revenues of $30bn in just one quarter.
“If you track Nvidia from its initial public offering in 1999 to when it became the world’s most valuable company, it experienced a 591,000% increase in its share price,” Chris says. So, if the demand is there, why has Nvidia’s value dropped so dramatically?
Unsustainable growth
For two years, Nvidia’s growth has been unprecedented, and investors wanted the company to maintain its momentum. But the simplest explanation for Nvidia’s plateau is that its rise has been unsustainable and time-limited.
“People thought that Nvidia was going to continue growing at that pace,” Chris says. The company is now in a strange situation where, even though their growth rate is still high – their revenue was up a record-breaking 15% from last quarter – it still falls short of market expectations, with shares taking a 7% hit.
“Practically any other CEO in the world would be overjoyed with the growth that Nvidia is seeing, but because it’s not like the obscene surges that were seen in prior years people are finding it a little bit underwhelming,” he adds.
The jitters around Nvidia’s slowdown is mirroring a wider concern about sky-high valuations in the AI sector. For the last year and a half, Wall Street has been throwing bucket-loads of money into the sector, but now it seems that investors are slightly more reserved, as they become more clear-eyed about the extent to which generative AI is going to become a transformative, world-changing technology. “I think most people still think that there will be an impact, but they maybe don’t think that everything is going to change quite as quickly as many thought,” Chris says.
Supply chains
While Nvidia owns the technology, they do not mine or create the raw materials themselves, leaving them vulnerable to supply chain disruptions. Their primary supplier is the Taiwan Semiconductor Manufacturing Corporation, and there is apprehension about possible supply chain disruption given the increasing hostility between Taiwan and China.
“There is unease [about what would happen if] China decided to do something to Taiwan, then suddenly, what is already a very tight supply of chips which are being sold as fast as they’re being produced, could become even tighter,” Chris says. It has the potential, he says, to derail the whole supply chain.
Legal woes
A report from analytics platform CB Insights estimates that Nvidia has 95% of the GPU market for machine learning, effectively creating a monopoly. According to reports, the US justice department has begun ramping up an antitrust investigation into whether the company has breached competition laws. “Nvidia can, to a degree, both name its own price and terms, so there are some concerns by antitrust officials that the company could be offering perks to those who block-book with them,” Chris says.
The US is also highly concerned about Nvidia selling its chips to China, which, they believe, is using the technology to modernise its military capabilities. With a degree of success, Washington has set up a tech blockade by banning the export of advanced chips – but, as a New York Times investigation found, Nvidia has simply found workarounds and these chips are still ending up in China.
Is there a bubble?
Nvidia is not like one of the many so-called unicorn tech startups of the last decade that were wildly overvalued while offering very little in the way of goods, services or profit. It has sold hundreds of billions of dollars worth of its product and there continues to be huge demand. But Wall Street analysts are split about its future. “Some are saying it’s a boom stock, others aren’t quite as negative yet but they have started winding down their expectations for growth in the last month or so,” Chris says.
In a situation where there is a bubble – and it does pop – the wider knock-on effect, not just on Nvidia and the tech sector but also on the broader economy, could be significant.
“There is this worry in the air, where people are wondering, are we seeing a replication here of the dotcom bubble,” Chris says. “But we just don’t have the answer right now”.
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