Not everyone has heard of Nvidia. The company used to be known as the biggest designer and manufacturer of GPU (Graphic Processor Unit) chips. This is a critical hardware board that makes the explosive speed of graphics in, for example, video games possible. Most PCs include the Nvidia GPU. The newly released Nintendo Switch game console is based on the Nvidia Tegra GPU.
However, this is only half of the story. Since the serious eruption of Artificial Intelligence, sales, market share and profits of Nvidia have soared. Its share price has multiplied by 7 in the last two years. Its P/E ratio has climbed to a nosebleed value of 46, indicating that investors don’t expect the company’s growth to slow down in the foreseeable future.
How is it possible? How could a brilliant, yet stable company mostly linked to a stagnating market (PCs) suddenly rise surfing the wave of AI? What can CEOs in tech learn from it?
The story of Nvidia and AI is a typical case of skills and luck, or as it is academically called: “Emerging strategies”.
Indeed, Nvidia had not enjoyed this amazing journey without events that were absolutely outside its reach and control. It was almost by chance that Google, as a part of its new ventures, decided that AI would be a new area to focus on. It made of course sense because the search giant owns an amazing amount of data, a necessary prerequisite to succeed when implementing artificial intelligence services. Google BRAIN project was thus launched in 2011 as part of the Google X incubator.
A main question became apparent. Which hardware should the AI algorithms run on? It happens that AI needs massive amounts of fast computation, and the chips that can provide it are GPUs. When Google decided to build its first BRAIN computer on the GPUs provided by Nvidia instead of rival AMD, the fate of both companies got sealed. Nvidia would become stronger, learn faster how to design AI-specific boards, build brand and reduce sense of risk for decision makers and startups betting on AI around the world.
The result? In just one year, from 2014 to 2015, Nvidia market share on GPUs rocketed to 82% as the AI industry reached escape velocity. AMD saw its own market share trounced to just 18% from 40%.
The disparate fate of both companies, is also reflected in the amount of resources that both companies, Nvidia and AMD have dedicated to R&D since the BRAIN-year zero 2011. Thanks to the external help from Google, Nvidia was able to foresee the birth and probable growth of the Artificial Intelligence market. As a result, it boosted its R&D expenses to improve the GPU performance at the top of the market, thus claiming the dominant position as the king of AI.
AMD on the other side, got blind-sided. It had no clear AI customer and had to stick to a customer, the PC industry, that was stagnating under the pressure of the iPad and other tablets. In which probably was a rational strategic decision, the management of AMD reduced R&D expenses and focused on the low-end of the GPU marked. It was the kiss of death for AMD.
Today, Nvidia has 70% market share of GPU, AMD has pushed it up to 30%. What about almighty Intel, you may ask yourself? Well, Intel is nowhere to be seen. They lost the AI train a long time ago. Not sure they ever will become a relevant player in this industry at all.
The chain of events that has lead Nvidia to its current position is indeed the result of an extraordinary lucky strike that neither Nvidia nor AMD could have foreseen. CEOs and decision makers in the tech industry can nevertheless extract valuable insights from the from this story. AMD could indeed have done better. I discuss it in the post: What CEOs can learn from the rise of Nvidia.
- Get out of the building
- Beware the cost-cutting trap
- Make market share a top priority
- Expand to new customers that may need your technology too
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