Something is causing great consternation among Nvidia Corporation (NASDAQ:NVDA) investors, who are down nearly 6% on their investments so far in 2017. That’s after NVDA stock hit a high of more than $119 as recently as February.
In the original vision for cloud computing, a decade ago, it was an article of faith that the cloud was designed to harness cheap, low-power chips and combine their resources to get the most bang for a computing buck.
The advent of artificial intelligence, and the need for clouds to support AI, is forcing a re-think.
This is highlighted by Alphabet Inc (NASDAQ:GOOGL) — the artist formerly known as Google, the first company to bring the cloud to glory — designing its own machine learning chip, dubbed a Tensor Processing Unit. It is said to deliver a lot more price-performance than “competing” processors from Intel Corporation (NASDAQ:INTC) and, to our point, Nvidia.
But those who are bearish on NVDA stock are missing an important point.
First, the new Google chip was compared against an old Nvidia chip, not its newest design. More importantly, as Nvidia CEO Jensen Huang wrote in a recent blog post, this is a war where every advanced chip company is going to win.
“Without accelerated computing,” he wrote, “the scale-out of AI is simply not practical.” Artificial intelligence, or deep learning, “is a new computing model that has required the invention of a new computing architecture.”
The design models that Nvidia has been using for graphics are ideal for deep learning, and thus for delivering AI at scale. This was the point when Alibaba Group Holding Ltd (NYSE:BABA) announced more than a year ago it would ally with NVDA on cloud AI for its “AliCloud.”
Google may order production of a bunch of Tensor chips for its cloud processing centers, but do you think Amazon.com, Inc. (NASDAQ:AMZN) or Microsoft Corporation (NASDAQ:MSFT) are going to be filing big orders for a direct cloud competitor’s processors?
Not when there are alternatives around, and there are. As Mr. Huang noted, Nvidia has one.
A Needless Kerfuffle
Nvidia did $6.9 billion worth of business for the quarter ending in January, mainly for graphics processors used in game machines, and its last two quarters indicate fiscal 2018 sales will run well over $8 billion.
The April quarter is notoriously weak because most new models come out in the fall for delivery at Christmas. Last year, NVDA had sales of $1.3 billion in the April quarter, from which $470 million, or 73 cents per share, flowed to net income.