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Monopolist:

Nvidia CEO

Jensen Huang

Photo:

Edgar Su/REUTERS

What's happened:

After announcing its quarterly results at the end of February, Nvidia gained more stock market value in one day than any company before: almost $280 billion.

This increase corresponds to almost the market capitalization of the entire German auto industry (around $300 billion) or around half of Tesla's stock market value (over $600 billion).

Nvidia is now worth almost $2 trillion.

And what really happened:

The reason for the gigantic jump in stock market value is primarily that sales of Nvidia's data center division grew by 409 percent compared to the same period last year.

Behind this lies the highly profitable business with the extremely expensive chips on which the artificial intelligence applications run.

Because of the AI ​​chips, Nvidia's return on sales has increased from around 16 percent a year ago to 54 percent now.

Gross margins are now 76.7 percent.

This is a level like that of Mastercard – that is, like a completely digital business.

The price jump is entirely rational in view of such profit growth.

In fact, due to the rapid increase in profits, the stock is actually valued at a much lower price in relative terms than before.

The price-to-earnings ratio - a measure that shows whether a stock is valued high or low - fell despite the price jump.

Why Nvidia won't be able to maintain these dream margins

It's quite possible that Nvidia can maintain these high profit margins for a few more quarters, perhaps even a year or two.

But at least in the medium term it is almost impossible that they will remain at this level.

Nvidia achieves such margins because the company is a kind of monopolist for AI chips, which are currently in high demand due to the boom in ChatGPT and similar AI applications.

But precisely because of these high profit margins, it is highly unlikely that Nvidia will remain the monopolist in the area.

The company doesn't earn its dream margins in an inconspicuous niche market.

Not only chip manufacturers such as Intel and AMD, but also major Nvidia customers such as Meta, Amazon and Google develop their own chips.

The big tech companies Amazon and Google in particular will certainly not accept long-term purchases of chips that provide others with a margin of almost 80 percent.

Plus, the players have enormous financial resources and the talent to catch up on their own.

Nvidia has a lead and of course chip development is more complex than building an app.

But this lead cannot be defended permanently.

If Nvidia's margins were halved, they would still be outstanding for a chip manufacturer - but Nvidia would then probably be heavily overvalued.

Why Nvidia will hardly be able to keep up with Google and Amazon in the long term

Nvidia is currently valued higher on the stock market than Amazon or Google.

But its weak point is that its success has so far been based on a relatively small product line.

Google and Amazon are much more broadly positioned.

The specialization is risky for Nvidia because it is not unlikely that other companies will successfully attack its AI chip business.

Last week there were reports about former Google AI chip engineer

Jonathan Ross

's competitor Groq .

The company produces chips on which, according to initial tests, AI applications not only run around ten times faster, but are also many times cheaper to operate.

If such or similar new developments keep their promises, it could very quickly reduce the value of Nvidia's data center business.

Why it helps AI development if Nvidia becomes less profitable

There is already a fairly wide use of AI in areas such as software development, marketing or customer service.

However, one obstacle to even more comprehensive applications is that the costs have so far been considerable - and this is also due to the high prices for Nvidia's AI chips and the fact that they consume a lot of energy.

Nvidia CEO

Jensen Huang

(61) has stated that a “tipping point” in the use of AI has been reached – with demand increasing worldwide across various industries.

But the real AI tipping point will be reached when costs have fallen significantly again - and with them Nvidia's margins.

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