Nvidia– The Trillion-Dollar Tech Company

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Good morning! It's Tuesday, August 29th- Today we are breaking down Nvidia’s road to becoming the newest member of the trillion-dollar company club!


Nvidia— The Trillion-Dollar Tech Company

Last year, only four US companies were in the trillion-dollar club: Amazon, Microsoft, Apple, and Google.

But now, there’s a new member.

Tech company Nvidia has seen its stock value more than double over the last 6 months to an enterprise value of $1.13T!

So, What’s the Business?

This trillion-dollar company had humble beginnings. To be specific, the company was founded after a meeting in a San Jose Denny’s where founder Jensen Huang and his two partners discussed the future of the computer industry.

After the meeting, the three concluded that the next wave of computing would be graphics-based. So they set to work on an industry innovation, creating the GeForce 256– the world’s first graphics processing unit (GPU). GPUs improve performance and graphics quality by offloading the graphic processing from the central processing unit (CPU).

By creating the GPU industry, Nvidia powered the first wave of 3D video games and quickly dominated this niche. While this was a lucrative niche that led to a multi-billion-dollar valuation, founder and CEO Jensen Huang understood that advanced computer processors would be in high demand across a variety of industries.

As of 2021, the gaming sector makes up 45% of Nvidia’s total revenue, but the company serves four other markets: data centers, professional visualization, automotive, and original equipment manufacturing.

Across these markets, Nvidia generated $32.7B in revenue over the last 12 months. This figure is even more impressive considering that their gross profit over the same period was $15.35B!

Here are the two revenue segments that Nvidia prioritizes

  • Graphics: The most dominant products in this segment are the GeForce GPUs for gaming and PCs, but hardware for enterprise design, cloud-based visual and virtual computing, and automotive platforms make up a sizable portion.

  • Compute and Networking: This segment includes Nvidia’s data center platforms, cryptocurrency mining processors, and high-performance computing systems for AI.

Nvidia doesn’t dominate the high-end computer processor market because of marketing techniques or anti-competitive practices. Rather, the company invented the industry itself and has continually invested in research and development to stay decades ahead of the competition.

As such, Nvidia serves as the only viable solution for tech companies in need of the latest hardware. For example, Tesla is using 5,760 Nvidia A100 GPUs to train their self-driving systems. Each one of these systems costs $10K, meaning that Tesla paid $57.6M in addition to setup, maintenance, and leasing fees. Meta has also been using Nvidia since 2017, with its 22,000 V100 GPUs to train AI models.

How They Win: Ride the Wave

Before 2016, Nvidia was a fraction of what it is today with a valuation fluctuating between $10B and $20B. But the cryptocurrency and Bitcoin craze in the middle of 2016 sent Nvidia’s valuation soaring.

Bringing Bitcoin to market requires a computationally intense process called mining, and Nvidia’s computer systems were the only hardware that could keep up. Depending on the size of their mining operations, Bitcoin miners were purchasing dozens, hundreds, and even thousands of Nvidia GPUs at a time.

The Bitcoin craze eventually ended and caused Nvidia’s stock to drop by 57%. However, this loss was mitigated by the fact that the company grew 11X over 18 months as a result of the crypto mining boom.

With the massive influx of capital, Nvidia positioned itself for the next wave to come: AI. By developing the best processors and databases on the market, Nvidia was the only viable solution for OpenAI, and the company purchased 10,000 GPUs to create ChatGPT.

Key Observation

Critics have always been predicting the downfall of Nvidia, claiming that the company’s revenue numbers will drop when consumer trends things like custom PCs, Bitcoin mining, and pandemic gaming fizzle out.

These critics weren’t making baseless assumptions. They clearly saw that the company used various trends in consumer interest to boost growth.

Despite this, they were consistently wrong in their predictions because they failed to see how Nvidia leveraged their gains from each trend to set themselves up for the next big thing.

That’s why Nvidia is now the trillion-dollar company facilitating the tech behind Tesla, Meta, and OpenAI.