Twenty-five years ago, Intel (INTC) made history by becoming one of the first tech companies included in the Dow Jones Industrial Average. Today, NVIDIA (NVDA, Financial) has surged sevenfold in stock price over the past two years, replacing Intel as a new member of this prestigious index. This shift marks the beginning of a transformation within the chip industry.
The demand for chips powering generative AI technology remains robust, with high-end AI chips still in short supply. This lucrative market has few participants, seemingly ensuring profitability and rising stock prices for the involved companies.
However, investing in chip stocks has been risky this year. Intel’s shares have dropped nearly 50%, while NVIDIA’s have tripled, making it the best-performing company among the Dow’s components. This stark difference in stock performance is tied to three major challenges the industry faces.
Firstly, most chip manufacturers currently lag behind in designing and producing high-performance AI chips. NVIDIA’s advanced designs set higher industry standards, moving away from the era dominated by smartphone and car manufacturer needs. Even technologically and financially capable firms face long delivery times due to stringent quality standards.
Secondly, the two largest companies capable of manufacturing high-end AI chips globally are recovering from previous setbacks. Intel’s 2015 factory revamp delay hampered its chip acceleration progress, threatening its leadership in global chip manufacturing. Consequently, TSMC narrowed its technology gap with Intel by producing 10-nanometer chips in 2017. Since then, Intel has ceded its manufacturing advantage to TSMC.
NVIDIA outsources its physical chip manufacturing, a highly lucrative sector. Intel’s market share is minimal compared to TSMC’s 62% share. Similarly, Samsung falls behind SK Hynix in high-bandwidth memory chip production, crucial to all NVIDIA AI chips. SK Hynix is expected to claim over 52% market share, surpassing Samsung, according to TrendForce.
Thirdly, like the real estate and automotive sectors, the high-end chip market is significantly outperforming lower-end markets. The profit gap between high-end chips and general-purpose memory or traditional electronics chips has widened. While demand for devices like smartphones and PCs has waned, the average selling price of high-performance AI chips is about five times that of traditional memory chips.
This trend strengthens the “winner-takes-all” phenomenon in the chip industry. The top two global chip manufacturers this year are NVIDIA’s main suppliers. TSMC reported record net profit in its latest earnings and raised its annual revenue forecast, while SK Hynix achieved record operating profit last quarter. Both companies posted operating margins exceeding 40% in the third quarter, more than double their peers. TSMC’s stock rose 80% this year, while SK Hynix increased by a third.
The risks of falling behind are at an all-time high. Samsung’s recent quarterly chip business profits missed expectations, and Intel, striving to compete with NVIDIA, introduced its AI chips but still reported a massive $16.6 billion quarterly loss. Intel also withdrew its $500 million sales forecast for its 2024 Gaudi AI chips. In contrast, NVIDIA’s data center business, responsible for AI chips, reported sales of $26.3 billion in the quarter ending in July.
With traditional memory chips increasingly oversupplied, their prices and margins are expected to be further squeezed in future quarters. High-margin AI chips are becoming the sole offset against this weakness. In a world dominated by NVIDIA-driven AI, the message for global chip manufacturers is clear: if you can’t beat them, join their supply chain.
https://www.gurufocus.com/news/2602173/nvidia-nvda-dominates-ai-chip-market-as-intel-falters
