Soaring profits mean Nvidia’s valuation doesn’t appear elevated, but are those profits sustainable?
Soaring demand saw gross margins hit 76 per cent in the latest quarter. Nvidia expects to maintain these incredible margins this year.
Enormous profit margins mean competition is inevitable. In December, AMD launched a new chip it claims is faster than Nvidia’s. It is spending $5.9 billion annually on research and developments – almost as much as Nvidia. SoftBank founder Masayoshi Son is reportedly seeking $100 billion to fund a chipmaker to rival Nvidia. Meanwhile, Microsoft, Google, Amazon and Meta want to take control of their AI hardware by developing in-house AI chips.
Nevertheless, markets seemingly envisage perpetually elevated profit margins, says Chameleon Global Capital’s Toby Clothier. He estimates Nvidia’s share price requires profit margins of 55 per cent over the next decade.
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The bullish argument is that Nvidia will remain dominant due to the complex nature of their chips. The Nvidia Hopper GPU has 35,000 parts and weighs 70 pounds, says Nvidia boss Jensen Huang. “These are really complicated things we’ve built. People call it an AI supercomputer for good reason.”
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Perhaps, but monopolist-like profit margins mean others will compete, says Vantage Point’s Nick Ferres. “That is how capitalism works,” he says.
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