cautionary tale
In his letter to shareholders, Wood makes a good comparison between Nvidia and Nvidia. Cisco. At the dawn of the Internet in the 1990s, Cisco was in the spotlight for a long time thanks to breakthroughs in his hardware equipment: routers and computers.
Naturally, investors rushed into Cisco stock, ultimately making it the most valuable company in the world. Currently, Cisco is not even in the top 50 most valuable companies as measured by market capitalization.
On the surface, I understand Wood's comparison. Demand for Nvidia's graphics processing units (GPUs) and data center services is unusually high, thanks to investment urgency surrounding the AI narrative.
Wood warned that increased competition could create difficulties for Nvidia, and that it could come sooner rather than later. While this may be true, I'm not completely convinced by this argument. It is important for investors to understand the fundamental details of increased competition.
Image source: Getty Images.
Competition is increasing, but…
In the aftermath of the dot-com bubble in the early 2000s, Cisco was unable to innovate at the same pace as its competitors. As a result, computing hardware became a commoditized product, and Cisco faced an existential crisis. Although Cisco remains a successful business, it's clear that the company ultimately lost support from investors.
When it comes to Nvidia, we see things very differently. First, the design of semiconductor chips and high-performance computing is much more sophisticated than the manufacturing of routers. In other words, Cisco's hardware was innovative in the early days of the Internet, but it wasn't long before competing products emerged.
Nvidia absolutely has competition, and that means competition from chipmakers. Advanced Micro Devices and Qualcomm. Moreover, the following competition is rapidly entering the scene: microsoft, Amazon,Furthermore tesla. While I agree with Wood that increased competition could impact demand for Nvidia's chips, I don't think she's giving the company enough credit.
Investors need to realize that unlike Cisco, Nvidia has options. The company is diversifying its models beyond semiconductors and building an end-to-end AI platform.
…NVIDIA has a plan
Although the number of entrants into the chip space is increasing, Nvidia still maintains a competitive advantage. The company is a pioneer in his GPU space, giving Nvidia an enviable first-mover status. While it's possible that Nvidia may lose some of its pricing power and market share over time, I don't see this competition as much of a threat.
Additionally, with a whopping $26 billion in cash on its balance sheet, Nvidia has been aggressively investing in all sorts of areas across the AI spectrum to expand beyond chips. His two high-profile applications being considered by Nvidia include humanoid robotics and enterprise software.
Nvidia recently joined forces with OpenAI, Microsoft, and intel In a $675 million funding round for robotics startup Figure AI. In addition, the company is currently an investor in Databricks, the world's most valuable privately held software business. I see both of these partnerships as ways for Nvidia to strengthen its under-the-radar software business. The software business has already earned him $1 billion in revenue.
Could Nvidia become the next Cisco? Of course, anything is possible. What's more likely, I think, is that if his Nvidia bets in robotics and software don't work out, the company could start to experience a slowdown in growth. Such a situation could lead to panic-inducing selling by investors.
But in my opinion, I don't think that will happen. I'm encouraged and impressed by all the moves Nvidia is making outside of chips. The stock is certainly enjoying some momentum, and I think his Nvidia can maintain this momentum. And I'm optimistic that the company's best days are ahead.
