Microchip maker Nvidia more than doubled its revenue in the second quarter, thanks to a handful of “whale players” who accounted for nearly every second dollar of the company’s revenue.
Four customers, whose identities were kept anonymous for competitive reasons, directly purchased goods and services totaling 46% of Nvidia’s $30 billion in revenue, or about $13.8 billion, according to the company’s 10-Q regulatory filing released alongside its highly anticipated quarterly investor update.
Each accounted for more than a tenth of total sales, and their purchases were all related to the thriving business of selling chips to data centers that entrepreneurs like Elon Musk are eager to build in the wake of the artificial intelligence gold rush.
For comparison, this quartet of customers contributed more to revenue than Nvidia reported for the entire previous year.
Video from inside Cortex today, the massive new AI training supercluster being built at Tesla’s Austin headquarters to solve real-world AI problems pic.twitter.com/DwJVUWUrb5
– Elon Musk (@elonmusk) 26 August 2024
Although the names of the mysterious AI whales are not known, they are likely to be Amazon, Meta, Microsoft, Alphabet, OpenAI or Tesla.
Nvidia’s hottest product is AI chips like the H200. These are needed to train large language models like OpenAI’s GPT-4. They are also used to support inference, the process that ChatGPT or Sora use to generate responses to text-based prompts.
This reliance on a handful of large customers also underscores the market’s growing concern about how sustainable this abrupt, exponential growth from just one of the company’s divisions can be. Some investors, such as Elliott Management and Citadel, have expressed skepticism about how long this can be sustained.
The past is indeed a cause for concern. The semiconductor industry is known for its boom-and-bust cycles.
Nvidia shares are expected to open lower on Thursday, underperforming the broader stock market.
One customer generated more revenue than Nvidia’s second-largest business
In fact, Nvidia’s business relationships with these whales are so significant that the company reports them in a section of its quarterly reports entitled “Revenue Concentration,” which is dedicated to concentration risks.
“We have experienced periods in which we have derived a significant portion of our revenue from a limited number of customers,” the company said in its 10-Q filing with regulators, “and this trend may continue.”
This trend is incredibly profitable. Nvidia earned $5.60 in net profit for every tenth dollar of revenue in the first half of the year – margins that most companies can only dream of.
This explains why profit after tax in this six-month period almost quadrupled compared to the previous year and amounts to 31.5 billion dollars. Whether sales and thus profits can continue to grow at this rapid pace is of crucial importance for the group’s investment story.
Take, for example, the “Customer B” named in the filing: Its direct purchases accounted for 11% of Nvidia’s $30 billion in revenue. That means a single company contributed more to revenue than the company’s second-largest division—gaming, at $2.9 billion—in total.
However, Customer B remained below the 10% threshold throughout the first half of the year, suggesting that it increased its spending significantly in the last quarter, seemingly out of the blue. The same could be said about “Customer C” – the numbers provided by Nvidia are identical.
$NVDA pic.twitter.com/Lym4uHBCXs
— Jesse Cohen (@JesseCohenInv) 27 August 2024
In an interview with Bloomberg TV on Wednesday, CEO Jensen Huang answered the question of where demand comes from beyond the few hyperscalers such as Microsoft, Google and Amazon.
“We are relatively diversified today,” he claimed, pointing to a number of different customer groups.
But his own company’s figures seem to contradict this conclusion. In the same period last year, there was no direct customer in either the first or second quarter whose business accounted for 10 percent or more of total sales.
Nvidia did not immediately respond to a request from Assets for a comment.
In our new special edition, a Wall Street legend gets a radical makeover, a story about crypto injustice, misbehaving poultry kings, and more.
Read the stories.
