The Economic Obsolescence Risk to NVIDIA GPU's

The financial press has had a field day in discussing the depreciation risk associated with high end NVIDIA GPU chips. However, lurking beneath the surface is the risk of economic obsolescence. That risk will come from the availability of lower cost chips such as the Google Tensor processor. Moreover, additional competition will come from Amazon and Elon Musk who are developing their own chip sets.

The arithmetic is simple. A high-end NVIDIA GPU chip set costs about $60,000 of that $43,800 represents NVIDIA’s extraordinarily high 73% gross margin. In this example NVIDIA’s cost is $16,200. Herein lies the risk. Lower cost chips produced, at say a more normal, but still high 60% gross margin would yield a price of $40,500. Thus, AI competitors using the newer chips would have a significant 1/3 cost advantage thereby rendering the existing NVIDIA chips economically obsolete. In a way NVIDIA could very well become a victim of its own success.

To be sure, NVIDIA is a technological behemoth, and it has its CUDA software to lock in existing customers. Nevertheless, the mere existence of a 73% gross margin will ultimately bring price competition into the GPU landscape.