Author: Bradley Tian, Graphics: Nina Tagliabue
The BRB Bottomline
As a disruptive leader of the semiconductor industry, NVIDIA is a rare example of a technology firm expanding with continuous success. How does NVIDIA maintain this trajectory, and what can aspiring entrepreneurs learn from it?
With recent speculations about the Metaverse stirring frenzies across the semiconductor industry, NVIDIA has once again come under the limelight. Over the last month, NVIDIA’s share price has seen an increase of over 42%, marking another surge in its rise of over 130% in the trailing twelve months. This increase is outstanding – even considering investors’ general affinity towards the technology sector – as it significantly outperforms other major competitors in the industry.
Source: TradingView
NVIDIA’s recent success is preceded by an excellent track record: over the last consecutive five quarters, the company’s non-GAAP gross margins have remained at well above 60%, leading to bountiful cash flows and a shiny balance sheet. Such a strong performance is directly associated with NVIDIA’s seemingly-magical ability to capture major computing demands that have emerged over the past years, ranging from AI to cloud computing to ray tracing. How does NVIDIA keep this magical charm, and what can we learn from this disruptive leader of the semiconductor industry?
Founded by Jensen Huang and his colleagues in 1993, NVIDIA specializes in the development of graphic processing units (GPUs), which are welcomed by both entertainment and professional markets for their ability to handle enormous data transfers and higher-order computing tasks. The firm’s current product portfolio consists of four main categories, which are high-performance gaming, data center solutions, complex visualization, and cryptocurrency mining. As a product-oriented company, much of NVIDIA’s success owes to two factors.
Strategic Product Specialization and Expansion
The first factor is NVIDIA’s strategic balance between specialization and expansion in its product portfolio. Since releasing its first processing unit—the GeForce 256—in 1999, NVIDIA had dedicated all of its early R&D efforts and acquisitions towards one single goal—mastering graphic processing and attaining technological leadership in that field. This process took well over 10 years, but the reward was a concrete, proprietary technology base that paved the critical foundation for NVIDIA’s dominance in high-performance gaming later on. With its unparalleled discrete GPUs (popularly used in generating realistic video game graphics), NVIDIA soon became the leading supplier of visual processing hardware, developing partnerships with major video game distributors, such as Electronic Arts and Tencent. Today, NVIDIA controls a dominant majority of discrete GPU sales worldwide.
With over 50% of its revenue generated by product sales in the gaming market, NVIDIA has successfully established its business in the gaming category as the “cash cow” – a sustainable revenue stream that operates without intensive care.
Source: NVIDIA FY 2021 Investor Presentation
NVIDIA has capitalized on the consistent cash flow and solid profit its gaming business generates by pivoting R&D to developing data center solutions with the same graphic processing technology base. Over the process of merely 3 years, NVIDIA’s data center business became the company’s second-largest revenue driver, with profitability surpassing that of its gaming business in FY2020. Its flagship products, such as the A100 Tensor Core GPUs, became favorites of cloud computing giants such as Alphabet and Microsoft.
In essence, NVIDIA has successfully snowballed its product portfolio using a chain-like strategy of specializing in one specific technology, attaining leadership in that field, and then using that technology as a springboard to expand into another field. Instead of running parallel R&D efforts or acquiring other firms to broaden its product portfolio, NVIDIA patiently invested many years into mastering its understanding of graphic processing technologies. This technical expertise is what allowed NVIDIA to quickly penetrate gaming and data center markets later on. For other rising tech companies avidly seeking to expand their product portfolios and achieve rapid growth, NVIDIA’s story serves as a powerful lesson that emphasizes the long-term rewards and opportunities brought by developing a unique, organic expertise.
Building a Competitive Moat
The second factor is NVIDIA’s construction of an impenetrable moat that uniquely tailors to its hardware products. In 2006, NVIDIA introduced what’s essentially its own “metaverse” for its graphic processing products. Known as CUDA, this parallel computing platform integrates hardware, software, algorithms, and databases to accelerate computing speeds. This software-based architecture directly appeals to NVIDIA’s primary consumer segment – programmers and software developers. Despite their enormous capabilities, GPUs can be difficult to program due to their complexity. CUDA acutely resolves this issue with the CUDA Toolkit, which simplifies the computing process for developers by providing them with a programming environment set in common languages, such as C and C++. Leveraging a single platform across all forms of applications, CUDA has added tremendous value to NVIDIA’s products by making them more flexible and easy to use. And here is NVIDIA’s ace up the sleeve: CUDA’s GPU integration process is closed, meaning that it only works with NVIDIA GPUs. For products from other manufacturers like AMD and Intel, a potential substitute for CUDA is OpenCL, another open-source platform for GPU integration. However, OpenCL’s performance is much less powerful than that of CUDA due to CUDA’s customized integration mechanisms with NVIDIA GPUs. Furthermore, NVIDIA is able to constantly update CUDA to fit newer hardware, securing its throne in the field of GPU computing.
Source: A Performance Comparison of CUDA and OpenCL
CUDA is the embodiment of several key strategies. In developing the CUDA toolkit, NVIDIA evaluated their products in the perspective of their main clients and precisely identified key pain points and limitations. By focusing on compatibility and connecting all of its consumers on a single proprietary platform, NVIDIA is able to effectively expand, manage, and secure its customer base against its competitors. Creating a comprehensive, value-adding user experience that pertains uniquely to the company’s own products is an excellent example of building a competitive moat to secure market share in an industry.
Take-Home Points
Summarizing these lessons from NVIDIA, here are some key takeaways for aspiring entrepreneurs aiming to build their own products. Investing in the development of organic, highly-specialized expertise can produce long-term benefits, such as strong capabilities for market penetration and diverse opportunities for expansion. In addition, establishing a value-adding, user-oriented ecosystem that tailors only to one’s own products is a great way to attract new consumers as well as to defend one’s market share against competitors.