The business world is increasingly banking on artificial intelligence to be the next big thing, and has found itself turning to one maker of computer chips in particular — Nvidia — to power the revolution.
On Wednesday, Nvidia's market capitalization hit $3 trillion, making it the second-largest publicly traded U.S. company, surpassing Apple and trailing only Microsoft.
Over the past 12 months, Nvidia shares have climbed nearly 200%.
What makes Nvidia so special?
Origins
Founded in 1993 — famously, over a meal at Denny's — Nvidia designs a special kind of programmable computer chip.
For decades, Intel and Advanced Micro Devices had dominated the U.S. chip sector.
But those companies specialized in producing CPUs — central processing units, which serve as the foundation for basic computing and software processes.
Nvidia, meanwhile, specialized in graphics processing units (GPUs). As their name suggests, GPUs are better able to render images, which meant that they were first associated with video and computer games.
But it turns out GPUs are also able to perform calculations concurrently in a way that regular CPUs cannot — making them more energy efficient and better able to handle sophisticated computing demands.
Over time, the other big chip makers began manufacturing their own GPUs to compete — but Nvidia, having enjoyed a first-mover advantage in the space, was where companies began to turn to for GPU needs.
It combined its chips with a suite of accompanying software that programmers simply preferred. Plus, its supply chain allowed it to produce GPUs in larger volumes, faster, and more reliably, than its rivals.
For instance, auto companies began turning to Nvidia chips for use in driver-assistance software that must process image information from sensors.
Nvidia hardware is now found in all Tesla vehicles.
Still, until 2020, Intel was a larger company by market capitalization than Nvidia.
Pandemic surge turns into AI revolution
During the pandemic, the shift to remote work and subsequent demand for data centers that could enable cloud-based computing — plus even more interest in video games while everyone was stuck indoors — accelerated Nvidia’s revenues even further.
Then Silicon Valley, led by OpenAI, began to realize the potential of artificial intelligence to transform how all companies do business.
The Nvidia ecosystem, from its software to its sourcing of materials, allowed it to position itself as the go-to source for companies that needed massive computing power to handle their AI needs.
Nvidia's fortunes have since gone stratospheric: Today, it is worth nearly $3 trillion according to its current stock price — nearly as much as Apple.
Company co-founder and CEO Jensen Huang acknowledged in an interview with CNBC last year that a combination of luck and skill has led to the company’s success.
“We just believed that someday something new would happen, and the rest of it requires some serendipity,” Huang said. “It wasn’t foresight. The foresight was accelerated computing.”
Today, virtually every major tech company, including Amazon, Google, Meta, Microsoft and Oracle, has made use of Nvidia chips.
Bloomberg News has called Nvidia’s chips the “workhorse for training AI models,” and PNC Financial Services Group analyst Amanda Agati described Nvidia’s lead in the category last fall, based on its valuation, as a “quasi monopoly.”
For Moody’s Senior Vice President Raj Joshi, Nvidia represents the “dominant” infrastructure player behind the current rise of the AI sector.
While other chip designers continue to work to catch up to Nvidia, the company’s three decades’ worth of GPU specialization — represents a massive advantage, he said.
“This emerging field [AI] is better supported by GPUs,” Joshi said in an interview with NBC News, adding: “Nvidia is providing the foundation for it in most cases.”
Nvidia also offers solutions for other sectors, like health care, that are not specifically tech-oriented, Joshi said.
“They have a big lead in these markets,” he said.
Playing catch-up
Nvidia’s specialization means it is able to charge a premium for its products. In fact, its chips, which are manufactured in Taiwan, are so unique that companies looking to build AI capabilities are complaining that there is a shortage of them.
While the Biden administration’s 2022 CHIPS and Science Act is designed to spur development of GPUs — and do so on U.S. shores — there is already concern about keeping up with market forces.
“The volume of chips that [AI companies] project they need is mind-boggling,” U.S. Commerce Secretary Gina Raimondo said this week. She suggested even more federal subsidies would be needed if the U.S. hoped to be a meaningful player in chip manufacturing.
“I suspect there will have to be — whether you call it ‘CHIPS Two’ or something else — continued investment if we want to lead the world,” Raimondo said during a virtual appearance at an Intel event. “We fell pretty far. We took our eye off the ball.”
In the meantime, investor interest in Nvidia remains frenzied. While some have speculated that its success could be a bubble, many Wall Street analysts say its financial statements have been proof that its product is viable.
“The health of their core data center business is genuinely stunning,” Goldman Sachs’ Tony Pasquariello wrote in a note to clients Friday.
Because it is now so much more valuable, Nvidia’s financial results carry greater weight for major stock indices, acording to Agati, who is chief investment officer and managing executive for investments at PNC.
In other words as Nvidia goes, so goes the stock market.
“[Nvidia] has become critical to the market’s path forward,” Agati said in an email to NBC News, adding: “In the saying ‘data is the new oil,’ Nvidia continues to prove it is in a league of its own.”
