Most investors likely recognize Nvidia (NVDA 3.32%) as the world's largest producer of discrete GPUs. They'll also attribute its recent growth spurt to the secular expansion of the PC gaming and data center markets, and point out that it's trying to buy Arm Holdings -- the world's largest designer of mobile chips -- from SoftBank (SFTB.Y 0.18%) for $40 billion.
However, those bullet points only scratch the surface of Nvidia's business. To gain a deeper understanding of this complex chipmaker, we should analyze three finer points that only smarter investors have likely spotted.
Image source: Nvidia.
1. It faces a hidden competitor in the data center market
The bullish thesis for Nvidia in the data center market is easy to grasp. CPUs use scalar processing, which process one piece of data at a time, while GPUs use vector processing, which processes a wide range of integers and floating point numbers simultaneously.
CPUs can't process machine learning and artificial intelligence (AI) tasks as efficiently as GPUs, so big data center operators have been installing more of Nvidia's GPUs to handle those tasks. That's why Nvidia's data center revenue rose 55% year-over-year last quarter and accounted for 41% of its top line.
But Nvidia faces a hidden competitor in this high-growth market: Graphcore, a private U.K. chipmaker that develops IPUs (intelligence processing units) for data centers. IPUs use graph processing, which process all of the data mapped out on a single graph at once.
Graphcore claims graph processing is more efficient than both scalar and vector processing. Last year, it released the M2000, a plug-and-play AI processing system that directly competes against Nvidia's A100 system. At the time of its launch, the M2000 delivered one petaflop of processing power for $32,450, compared to the A100's price of $39,800 per petaflop.
That price gap highlights a hidden long-term risk to Nvidia, since big data centers require thousands of petaflops of processing power. Nvidia is still much larger and more well-known than Graphcore, but the development of IPUs could challenge the notion that GPUs are the best choice for AI tasks.
2. It's not the world's largest GPU maker
Nvidia controlled 83% of the discrete GPU market in the third quarter of 2021, according to JPR. AMD (AMD 3.11%) held the remaining 17%.
Yet Intel (INTC -0.10%) is actually the world's largest GPU maker thanks to its integrated graphics chips for lower-end desktops and laptops. If we factor in those chips, Intel controlled 62% of the global GPU market in the third quarter, according to JPR, compared to 20% for Nvidia and 18% for AMD.
That difference wouldn't be worth mentioning if Intel and Nvidia were staying in their own lanes. After all, Intel seemingly abandoned the discrete GPU market more than two decades ago.
But in 2018, Intel announced it would launch a new discrete GPU by 2020. It achieved that goal with the launch of its new Xe GPUs last summer.
The first chips in that series, the Iris Xe Max (DG1), targets Nvidia's GeForce MX and AMD's Radeon RX chips in gaming notebooks. Intel plans to target the desktop market with its higher-end DG2 chips next year, and it's developing an even higher-end GPU (codenamed Ponte Vecchio) to challenge Nvidia's high-end GPUs in the data center market.
Intel hasn't emerged as a major threat yet, but that situation could change as it bundles more of its GPUs with CPUs for OEMs. Nvidia's investors should closely monitor these developments and see if they'll impact the gaming business, which generated 45% of its revenue last quarter.
3. The cryptocurrency market is a double-edged sword
Lastly, investors should pay attention to the cryptocurrency market. The last cryptocurrency boom and bust cycle in 2018 caused major headaches for Nvidia as miners hoarded cards and drove up prices for gamers. After that bubble popped, those miners flooded the secondhand market with used cards, which reduced the appeal of Nvidia's newer GPUs.
Nvidia has taken two major steps to avoid another bubble: It capped the hash rate of its new RTX GPUs to make them less appealing for Ethereum (ETH 1.14%) miners, and released a new line of dedicated crypto mining (CMP) cards to keep its gaming and mining markets separate.
Unfortunately, hackers quickly found a way to bypass Nvidia's hash rate limitations for its RTX cards. Meanwhile, the hot crypto market has recently caused prices for Nvidia's CMP cards to skyrocket, and that trend could make unlocked RTX cards a more cost efficient way to mine Ethereum.
That's the exact scenario Nvidia wanted to avoid, and it could face another ugly boom and bust in the cryptocurrency market in the near future.
Will these factors weigh down Nvidia's stock?
I'm still bullish on Nvidia and its long-term growth potential in the gaming and data center markets. But smart investors shouldn't ignore these three hidden threats, which could all stir up unexpected headwinds and challenge analysts' rising expectations for the beloved chipmaker.
