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How does Nvidia make money?

Catherine Brock

Wed, Oct 9, 2024 5 min read

Between 2023 and late 2024, Nvidia (NVDA) tripled its market value to $3 trillion, becoming one of the most followed stocks in the market. The catalyst was a steep rise in spending on artificial intelligence (AI) infrastructure as enterprises globally began building data centers to support their growing need for high-performance computing.

Nvidia's standout growth is intriguing to many investors, but your decision to invest demands deeper research. A good starting point for that research is understanding how Nvidia generates revenue.

Knowing the revenue model empowers you to evaluate corporate updates quickly for more confident and appropriate investing decisions.

Nvidia GPUs: Their flagship product

Nvidia designs and sells graphics processing units or GPUs. The company's history in this space dates to the late 1990s, when Nvidia invented the GPU for use in gaming applications. The architecture was innovative because it allowed small computations to run simultaneously rather than sequentially. The technology ushered in a new era of more realistic video game graphics.

Nvidia has since developed an ecosystem of software and computing tools around its GPUs. Developers use those tools to design and run complex, resource-intensive applications on Nvidia's hardware.

Nvidia AI: The new opportunity

Today, those applications go well beyond gaming. The company's most significant opportunity is in the field of AI. AI has been a focus for Nvidia since 2013 when CEO Jensen Huang realized that high-performance GPUs could play an instrumental role in the growing adoption of machine learning technology.

That revelation began paying off when the 2022 launch of ChatGPT took AI computing mainstream. The sudden, sweeping popularity of the AI chatbot motivated enterprises globally to launch new AI tools and related services. The need for computing hardware that is powerful and efficient enough to support AI applications skyrocketed. That hardware includes GPUs, tensor processing units, routers, switches, and storage solutions, among other things. These, along with software that enables AI development, are collectively called AI infrastructure. Enterprises house this infrastructure in technology facilities called data centers.

Nvidia’s industries and customers served

Data center infrastructure has been the primary growth source for Nvidia, but the company also serves other industries. Gaming is still a core segment, though its contribution is relatively small. The company is working to marry its expertise in AI and graphics, which could create revenue synergies. In 2024, for example, Nvidia launched “Nvidia Ace,” a suite of tools for developing interactive avatars, called "digital humans."

Nvidia hardware is also used in the automotive and robotics industries, including autonomous driving applications. Ayako Yoshioka, portfolio consulting director at independent asset manager Wealth Enhancement Group, believes autonomous driving is Nvidia's next big opportunity — although it may not come quickly. "They will be tied up in AI for some time," Yoshioka said.

Telecommunications is another segment to watch. Nvidia hardware is already used in 5G data centers. The company envisions advancing telecommunications services to support the growing needs of the AI computing revolution. Connectivity demand for robotics, driverless vehicles, smart factories, and more will increase as AI technology matures. Nvidia has also launched a research platform to support the development of 6G wireless technology.

Nvidia's customer list includes some of the world's largest companies: Alphabet (GOOG), Amazon (AMZN), Meta Platforms (META), Microsoft (MSFT), and Tesla (TSLA).

Nvidia’s competitive advantages

Nvidia has some noteworthy advantages that insulate it from competition. These include forward-thinking leadership, a proven ability to innovate, and a robust and proprietary platform around its hardware.

Forward-thinking leadership. Twice in Nvidia's history, Huang has identified broad market opportunities where his company could innovate and excel.
Proven ability to innovate. Nvidia has the expertise and resources to create new solutions to fill unmet demands. This partly relates to the company's focus on design rather than manufacturing. Nvidia is a fabless company, which means it outsources production to other companies like Taiwan Semiconductor (TSM).
Platform strategy. Hardware sales drive revenue, but Nvidia also provides a full suite of tools and resources developers can use to build and run applications. "This tight integration of hardware, software, and developer tools creates a moat around Nvidia's offerings that is difficult for competitors to match," Tower Hills Capital Founder and CIO Drayton D'Silva said.

Nvidia risks to watch

Despite its strong market position and formidable advantages, Nvidia and its investors face significant risks. These include rising competition, high investor expectations, and the changing demands of a fast-paced industry.

Rising competition. Nvidia's dominant position in AI-capable chips has a downside. Nvidia competitors want their share of this growing market, and clients want more options. "There are a lot of companies, including Nvidia's own clients, that are working on custom chip design. Those clients don't want to be locked into a single chip supplier," Yoshioka said.
Investor expectations. Investor optimism pushes the price of NVDA stock higher. If the company fails to satisfy expectations, a price correction will follow. Yoshioka recommends investors proceed with caution when expectations are high. Volatility can result when "too many investors look at Nvidia's growth and expect it to continue.”
Fast-paced industry. In 2023, Nvidia announced it would expedite its product roadmap by launching upgrades annually. The company previously followed a two-year refresh cycle. The change puts pressure on Nvidia to execute product launches flawlessly. Any delays or product failures could allow other providers like Advanced Micro Devices (AMD) to gain traction. AMD also upgrades its chips annually.

Whether you are interested in trading Nvidia or another stock, understanding the business model is an essential early step in your research. With that knowledge, you can better evaluate financial performance and growth strategies to ensure the asset is right for your portfolio.