Nvidia completes pricing-power circuitry
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add graphic.
By Robert Cyran
NEW YORK, May 21 (Reuters Breakingviews) -Nvidia NVDA.O is leveraging semiconductor design in unexpected ways. The artificial intelligence bonanza keeps fueling ever-greater expectations of turbocharged earnings growth. In the short-term, data-center fever underpins the growth. The market power this confers on the chipmaker, however, should complete a powerful financial circuit.
One integral component for the $2 trillion company co-founded and led by Jensen Huang is its gross profit margin. Many manufacturers face stiff competition and sell undifferentiated goods, like steel, for example. The dynamic puts downward pressure on profitability and impedes any single supplier from unilaterally jacking up prices. Nvidia, by comparison, is forecast to make an astonishing 77 cents on every dollar of revenue, after backing out the immediate costs of production, according to LSEG.
There are two main reasons for the impressive achievement. First, Nvidia produces chips used to train AI systems, and it has had persistent difficulty fulfilling all customer orders. The company’s data-center division grew revenue last quarter more than 400% from the same period a year earlier. There’s no sign yet of a slowdown in demand either.
Technology titans Microsoft MSFT.O, Amazon.com AMZN.O, Alphabet GOOGL.O and Meta Platforms META.O spent about $100 billion building out their infrastructure last year, Bernstein analysts estimate. Basic economic principles dictate this means chip prices will stay elevated. With even more investment ahead from software developers and data processors, the trend can be expected to persist for at least a few more quarters, too.
Eventually, supply will catch up with demand. Huang knows the drill. Nvidia’s circuity is used to mine cryptocurrencies, and when the price of bitcoin and others tumbled a couple years ago, so did the chipmaker’s profitability.
The longer-term trends are more promising. Over the past two decades, Nvidia came to dominate the market for processing units that render graphics and images that it once shared with rivals. It is also now the default standard in training AI systems. Its share in data center computing already has risen to 75%, according to Goldman Sachs analysts.
This clout helps pump up Nvidia’s gross margin, because customers have a limited number of places to shop. Intel INTC.O once had such pricing power in other areas of computing, but it was whittled away. It’s a cautionary tale for the industry, but one Nvidia needn’t heed closely anytime soon.
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CONTEXT NEWS
Nvidia is due to report its quarterly financial results on May 22, with analysts expecting the chipmaker to have generated $24.6 billion of revenue in the three months ended April 28, compared to $6.5 billion in the same period a year earlier, according to estimates compiled by LSEG. The company also is expected to report earnings of $5.59 per share, compared to 98 cents during the same stretch in 2023.
Nvidia gains pricing power, Intel loses it Nvidia gains pricing power, Intel loses it https://reut.rs/3wIjVNi
Editing by Jeffrey Goldfarb and Pranav Kiran
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