Nvidia has long been known as a leading graphics chip designer in the video game industry. Specifically, Nvidia’s greatest contribution has been the design of the Graphics Processing Unit (GPUs), which allows the central processing unit of a PC to offload the processing of graphics to a graphics design chip.
Nvidia’s Accomplishments
According to Nvidia’s website, Nvidia’s great contribution to modern commerce is the Graphic Processing Unit. Through this process, the Central Processing Unit of a computer is relieved from the duty of processing graphics, freeing up the Central Processing Unit to complete other tasks. Nvidia continues to be the market leader in that regard.
Founded in 1993, by Jen-hsun Huang, Curtis Priem, and Chris Malachowsky, the company’s goal was to create microprocessors that could render high quality 3D graphics.
By 1995, Nvidia launched its first product, the NV1, graphics chip. According to Nvidia’s website, the NV1 chip was the “PC industry’s first single chip accelerator supporting the multimedia features of Windows 95.” And thus, Nvidia made its very first product – the NV1 graphic chips – compatible with Windows. This would prove to be a crucial move in Nvidia’s success.
In 1996, Microsoft released its DirectX drivers, with Nvidia unveiling its Direct X drivers, it’s first graphics application for Windows. By taking control of the design of the drivers, Nvidia set up a system of continual quality control, that allowed direct communication with consumers, regarding issues with their products. This gave Nvidia a huge market advantage. By developing their own drivers, Nvidia was able to, year by year, continually improve the quality of their product.
In 1998, Nvidia made another crucial business decision by beginning a new partnership with Taiwan Semiconductor Manufacturing Company. In 1999, Nvidia also released GeForce 256, defined by Nvidia as “the world’s first graphics processing unit…a single chip processor with integrated transform, lighting, triangle setup/clipping, and rendering engines that is capable of processing a minimum of 10 million polygons per second.” The GeForce 256 is widely accepted as the world first graphics processing unit.
By year 2001, Nvidia was well on its way to becoming the industry leader in graphics chips for the gaming industry. By 2004, Nvidia made its first foray into the world of science and space by helping NASA reconstruct the terrain of Mars. Using the graphics innovations by Nvidia, data transmitted by the Rover was transferred into a viewable reality, allowing science professionals from NASA to see the surface of Mars in real time. By 2006, Nvidia’ CUDA architecture began helping science professionals run two or more processors to handle separate parts of an overall task, referred to as parallel processing.
By 2012, Nvidia made its first real move to bring the power of graphics technology and supercomputing to the benefit of the U.S. government. Indeed, in 2012, Oak Ridge National Laboratory introduced Titan, the world’s best supercomputer, powered by Kepler based Nvidia Tesla Graphics Processing Units.
Finally, In 2019, Nvidia solved the puzzle of capturing light rays in its graphics; called ray tracing. Ray tracing is a significant advance in graphics processing , which is the method of graphics rendering that simulates the physical behavior of light in real time. The physical simulation of how light behaves dramatically improves the reality of graphics processing. All of these accomplishments belong to Nvidia.
Nvidia-ARM Merger
The current news had been all about the Nvidia-ARM (Arm) merger. In 2020, Nvidia announced a merger with U.K. based Arm, owned by Japan’s Softbank Group. However, the deal faced serious resistance from multiple quarters. Indeed, the U.S. Federal Trade Commission, on December 2, 2021, sued to stop the acquisition of Arm on grounds of stifling competition.
The Complaint alleged that “if consummated, the Proposed Acquisition would allow the combined firm to use its control of Arm to harm Nvidia’s rivals in ways that substantially lessen competition in multiple markets.” In essence, the FTC alleges that Nvidia’s competitors, Samsung, Qualcomm, AMD, Apple, etc., are at risk of no longer being able to utilize Arm’s industry wide central processing unit designs and architectures.
Arm Processor Technology does not make computer chips. Instead Arm licenses its processor technology and uses a neutral licensing model; many firms are able to license Arm’s designs in many different industries. Smartphones, drivers, web servers are a few examples of the type of products that use Arm’s licensable processor technology.
The Complaint alleges that Nvidia has licensed Arm technology for years to create a wide range of computing products, while other firms create similar products, also using Arm’s processor technology. The FTC Complaint alleges that post- acquisition, Nvidia would have the “ability to disadvantage its rivals through its control of Arm through various mechanisms, including pricing, access to technology, Arm’s future technological developments, and Arm’s service and support.
As of January 25, 2022, rumors began to circulate that Nvidia would be abandoning its efforts to acquire Arm. On February 7, 2022, Nvidia formally abandoned the deal. According to Reuters, Softbank, the owner of Arm, is now considering an IPO for Arm. However, without the market power, organizational heft, and vision of Nvidia, Arm is not as likely a lucrative entity for Softbank as a stand alone IPO. Since Nvidia can continue to simply license Arm’s technology, as it has done for years, there does not appear to be a downside for Nvidia to abandon the Arm acquisition.
This would probably be a better result for the markets, and for consumers, since Arm’s technology would continue to be available to the entire market.
Nvidia Financials
Regarding Nvidia’s income statement, Nvidia has increased income by roughly 240% in the past five years. In 2017, Nvidia posted revenue of $6.9 billion. In 2021, Nvidia posted revenue of $16.675 billion.
Regarding its balance sheet, in 2017, Nvidia listed its total current assets at $8.536 billion. In 2021, Nvidia listed its total current assets at $16.055 billion, a 100% increase in current assets, and a doubling of its asset base. Further, Nvidia has tripled its long term assets from $9.8 billion in 2017 to $28.7 billion in 2021. Regarding liabilities, Nvidia’s current liabilities are $3.9 billion and their total long term liabilities are $11.9 billion. As such, Nvidia can easily meet its obligations, for both short term and long term debt, having more than twice the amount of its liabilities, in assets.
Regarding Nvidia’s cash flow from operations, the most important measure of performance, in terms of net income, has gone from $1.6 billion in 2017 to $4.3 billion in 2021. Total cash from operations has gone from 1.6 billion in 2017 to $5.8 billion in 2021. All data provided from Refinitiv.
Economic Moat
Nvidia is well positioned to continue its explosive growth forward well into the future. Nvidia is in a business which has high barriers to entry. Most importantly, Nvidia is the inventor of the graphics processing unit and enjoys the benefits of the patents it has acquired in that regard. No other competitor has access to Nvidia’s technology and such rival would have to acquire a license in order to access it. Since Nvidia’s business model has been primarily chip design and direct sale of its graphics chips directly to the market, it is not likely that Nvidia will license its technology to a competitor.
Further, costs to enter the graphics processing market is extremely high in that such rivals would have to create designs and manufacture the graphics chips in order to compete with Nvidia. Nvidia has been in the graphic processing unit business for almost thirty years. This amount of time has given them a huge industry advantage over new entrants.
Further, Nvidia has developed very deep connections in the computer graphics industry, including the Hollywood studios which need animation, and the U.S. government’s need for graphics in the science and defense industry. It is unlikely that a new entrants would be able to dislodge Nvidia’s connections in these markets.
The author believes Nvidia is a buy, and this recent disappointment regarding a possible merger does not significantly affect the value of Nvidia’s stock.
This article is based on the opinion of the author. This article cannot guarantee the accuracy of the data and shall not constitute a basis of liability for any loss. The author has an option in play for the purchase of Nvidia shares.