Two names that consistently dominate headlines are Elon Musk and Nvidia (NASDAQ: NVDA). Both names often take center stage, but it’s quite rare to see Musk and Nvidia in the same sentence.
But on Dec. 2, a report by DigiTimes suggested that Musk’s artificial intelligence (AI) start-up, xAI, struck a major deal with Nvidia.
Below, I’m going to break down what’s been reported so far and assess how a partnership between xAI and Nvidia could be a major catalyst for the semiconductor darling.
What did Musk do now?
Perhaps the hottest piece of infrastructure for generative AI development is the graphics processing unit (GPU). GPUs are chipsets that are capable of running extremely sophisticated algorithms at ultra-high speed around the clock.
Industry estimates suggest that Nvidia holds 88% of the GPU market — absolutely dominating the sector. With such enormous scale, it should come as no surprise that Nvidia’s GPUs are used by many of the world’s largest enterprises including Microsoft, Amazon, Alphabet, Meta Platforms, and Musk’s electric vehicle company, Tesla.
According to DigiTimes, Musk was involved in a deal between xAI and Nvidia — reportedly personally contacting Nvidia Chief Executive Officer Jensen Huang and offering more than $1 billion for a cluster of GB200 GPUs.
Image source: Getty Images.
Why this deal is so important
As it relates to xAI specifically, take a look at what Musk posted on X (formerly Twitter) back in September.
This weekend, the @xAI team brought our Colossus 100k H100 training cluster online. From start to finish, it was done in 122 days.
Colossus is the most powerful AI training system in the world. Moreover, it will double in size to 200k (50k H200s) in a few months.
Excellent…
— Elon Musk (@elonmusk) September 2, 2024
xAI is already working with Nvidia, specifically on the buildout of its supercomputer, dubbed Colossus. Moreover, Musk drops more than a few breadcrumbs suggesting that xAI will be doubling down on AI infrastructure sooner rather than later.
Considering xAI already snubbed Oracle earlier this year, I think Nvidia has a great opportunity to continue working alongside xAI — underscored by the new GB200 deal.
Dan Ives of Wedbush Securities is one of the most respected technology analysts on Wall Street. Ives recently wrote on social media that he sees more than $1 trillion of AI infrastructure spend during the next three years.
Given Nvidia’s existing footprint in the AI infrastructure landscape, there’s an argument to be made that the company will capture much of this incremental capital expenditure (capex). However, this may not end up being the case in the long run.
Is Nvidia stock a buy?
Despite its first-mover advantage in the GPU realm, direct competition from Advanced Micro Devices in combination with internal competition from its own customers leads me to question how much more Nvidia can really accelerate its growth.
As I’ve saidd before, I see Nvidia continuing to be a major pillar supporting the broader AI narrative for years to come. But as alternative GPUs come to market — presumably at lower prices — Nvidia’s ability to compete will become challenging. In other words, GPUs are going to become relatively commoditized and Nvidia’s hand is going to be forced at some point. Simply put, billion-dollar deals with the world’s most captivating AI businesses are a luxury, not a norm in perpetuity.
At the end of the day, I think Musk’s choice to use Nvidia products for xAI’s computing infrastructure speaks volumes to the quality of the company’s GPUs. While I’m encouraged by the relationship between xAI and Nvidia, this deal alone does not make the stock a buy. Even though Nvidia is well positioned to capture incremental market share as AI infrastructure investments rise, I remain cautious about the company’s long-term prospects.
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