When SoftBank’s Vision Fund took a stake of about 5 per cent in chipmaker Nvidia in 2017, it looked like vindication for one of the boldest strategies in the US semiconductor industry.
Jen-hsun Huang, Nvidia’s chief executive, had long argued that the company’s graphics processing units, developed to handle processes such as video gaming, would play a central role in the new era of data-intensive computing.
Last month, however, the vision ran out. SoftBank revealed that its fund had dumped its entire Nvidia stake — a holding which was worth more than $7bn at its peak last October, but which had collapsed to only $3.4bn at the end of 2018.
Among the questions left by the sale is how deep SoftBank’s vision runs. The giant fund has promoted itself to both investors and the companies it backs as a new type of tech investor, willing to place bigger, long-term bets on the major disruptions caused by technology. But it held the Nvidia stake for less than two years, while also hedging its stake amid last autumn’s tech stock tumble to protect itself from much of the decline.
SoftBank did not respond to a question about the length of its investment, which was unusual for the Vision Fund in being in a public company. Last month, it claimed a $2.8bn profit from the holding.
For Nvidia, the sale has thrown a spotlight on a difficult transition.
Amount wiped off Nvidia’s stock market value in the final quarter of 2018
Two weeks ago, the chipmaker warned that it was likely to report revenues of only $2.2bn in the three months to the end of January, the final quarter of its fiscal year. That is 30 per cent less than Wall Street had been expecting only two months before, and represents a shocking reversal: after growing by 40 per cent in the first nine months of its fiscal year, the change implies that revenues slumped by a quarter in the final three months.
The recent hit to highly valued tech stocks — along with the company’s own revenue slump — wiped 57 per cent, or $100bn, off Nvidia’s stock market value in the final quarter of last year before a bounce that erased a fifth of the losses. The question now is whether the pain is over — and whether Nvidia’s long-term prospects are still intact after the massive “reset” in its business.
Mr Huang is due to discuss Nvidia’s prospects on a call with analysts on Thursday.
The immediate cause of Nvidia’s pain can be traced to the collapse in the cryptocurrency market, where equipment based on its GPUs is used by “miners” to handle the intensive calculations required to authenticate transactions.
This dependence, which first led to a warning from Nvidia last November, has turned out to be greater than many investors expected. Some 25 per cent of the company’s sales were probably tied to demand from the cryptocurrency markets, said Ambrish Srivastava, an analyst at BMO Capital Markets in San Francisco.
The end of the bitcoin boom has had other knock-on effects. While GPUs were in short supply, companies building machines for gamers submitted orders to Nvidia for far more chips than they needed, said Patrick Moorhead, an analyst at Moor Insights & Strategy in Austin.
That contributed to a spike in pricing across the GPU market last year: AMD, one of the major producers, reported that its average selling prices in its computing and graphics business had jumped by 55 per cent in the first half of last year, with much of that down to GPUs. With excess inventory likely to take another quarter or two to clear, according to Mr Moorhead, those forces have gone into reverse.
Underlying conditions in the gaming market have made the sudden slump more intense. China’s limits on licensing new video games last year was seen as a major blow to demand. At the same time, Nvidia has reported slow take-up from gamers for its latest advance: chips that use so-called “ray tracing” technology, a way of simulating the effect of light hitting virtual objects that is credited with creating far more realistic images.
The question is whether this is anything more than a temporary blip. History suggests that gamers will quickly take to chips with ray tracing once developers produce more games that take advantage of it, said Mr Moorhead. Even if demand from the cryptocurrency market does not return, that would still bring renewed growth in Nvidia’s main market.
The company warned last month, however, that it is facing a new headwind: weaker demand from data centre customers, who represent one of its biggest hopes for long-term growth.
Thanks to their ability to handle large amounts of data, GPUs have been added on as accelerators in machine learning systems. The AI boom has made GPUs a key component in the data centres of cloud computing companies, though a recent slowdown after a capital spending boom has brought a pause in spending. However, Mr Moorhead estimates that only around 5 per cent of data centre servers have AI accelerators, leaving a large market up for grabs.
Nvidia once had this market to itself. But there has been a race to develop new chip architectures to handle “inference” — the task of applying machine learning algorithms to new data sets, the largest part of the new AI demand for silicon. Google has already developed its own specialised chips for machine learning, called TPUs, while Facebook and Amazon are both working on developing chips.
At the same time, other AI chips will soon become available. Intel, for instance, plans to launch a specialised chip for AI inferencing later this year, based on its CPUs. Start-ups like British company Graphcore represent another new source of competition.
The overall effect, said Mr Srivastava, is that Nvidia is facing far greater competition and will no longer have the AI market largely to itself. The stock price needs to fall further to reflect the new realities it is facing, he added.
But Mr Huang’s assurances that his company’s long-term prospects are undimmed — whatever the short-term troubles — still resonate with many. “It’s a growing market, and Nvidia has room to grow,” said Mr Moorhead. “Yes, there will be more competition — but the market is going to be so much bigger.”
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