Let's Make it Official

Hi everyone,

Five years ago, Nvidia was barely in the top 40 largest companies in the S&P 500.

This week, it became number one.

You’ve probably heard the saying, “Data is the new oil.” Well… Nvidia’s market is worth more than the entire US Oil & Gas industry combined.

Additionally, Nvidia has contributed 40% of all gains in the Nasdaq so far this year. At one point in late April, it contributed almost all of Nasdaq’s gains for the entire year.

As the AI-fueled craze marches on, it’s becoming difficult to poke holes in this juggernaut. Nearly every part of the supply chain (Memory, Equipment, Networking) indicates that there will be increasing purchases of Nvidia’s chips.

Core customers are strong, and diversification continues. Megacaps continue ramping CAPEX projections, while those outside the major cloud players also increase spending. Only 40% of revenue now comes from megacap players vs. 50% + before.

But how long can this last?

We know that CAPEX spending cycles don’t happen forever. Nvidia’s revenue is largely concentrated around its core data center GPU product. While this growth shows no sign of slowing over the short term, a stronger long-term narrative is needed to tell a better story.

The focus has shifted here over the last couple of weeks. Nvidia has been refocusing its narrative around an enduring platform play.

CEO Jensen Huang appears to be creating moats around the core parts of his business. He is doing this across three core pillars: 1) Software (CUDA), 2) Networking, and 3) Proprietary Cloud.

The first part of this moat is the CUDA software stack. CUDA has become the standard for GPU computing, creating a vast ecosystem of developers, software, and applications optimized specifically for Nvidia GPUs. CUDA has optimized performance, developer tools and support, and industry-wide adoption, which creates ecosystem lock-in. 

The second part of the moat is the networking side, which is required to operate and build a full-rack server. This year, Nvidia plans to design and procure the materials for servers and racks holding the GB200 chips before handing them off to server manufacturers that build and sell them. This verticalization would hurt companies like Dell, HPE, and Supermicro. In addition, Microsoft would have even less pricing power if Nvidia was in charge of the complete configuration. Microsoft has successfully pushed back on this, but they must play nice with Nvidia to get GPU allocation.

The final part of the moat is moving into the cloud. As highlighted in an article in The Information, Nvidia is also starting to move laterally to providing its own cloud service:

While we still have to see how this move into the cloud plays out, Nvidia seems to be keeping many competitive avenues open to capture even more of the ecosystem.

The cloud providers aren’t going down without a fight. They are starting to diversify even more to try to limit Nvidia’s dominance. They do this by purchasing more from AMD and building custom silicon to limit Nvidia’s pricing power.

However, the pricing power remains with Nvidia simply because their tech is too good to go anywhere else. In their most recent quarter, they printed 53% free cash flow margins, with estimates remaining at a rate of 50% over the coming two fiscal years. In fact, Free cash flow estimates of $83B ending CY25 are higher than estimates for Microsoft’s CY25 FCF of $79B.

Since Nvidia just de-throned Microsoft, let’s hold them up side by side:

Nvidia:

Microsoft:

Who are you picking?

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Cheers,

The GRIT Alpha Team

The author of this newsletter owns a position in Microsoft (MSFT), Nvidia (NVDA), Advanced Micro Devices, Inc. (AMD), Google (GOOG), and Amazon (AMZN) in their portfolio or in the funds they manage. There is no guarantee that the author will maintain such a position in the future.

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