Nvidia (NVDA -3.89%) gets a lot of attention from investors interested in artificial intelligence (AI) because its graphics cards are integral to the operations of so many AI-focused companies. Nvidia products are a go-to hardware component for cloud service providers and enterprises looking to jump on the AI bandwagon. Now the company inked a deal that will help it take advantage of another segment of this fast-growing niche.
Nvidia just announced a partnership with cloud-based data platform provider Snowflake (SNOW 0.61%). The financial details of the partnership were not made public, but Nvidia did say that enterprises and organizations using Snowflake's data platform will now be able to build custom large language models (LLMs) using Nvidia graphics cards, which can then be used to develop generative AI services such as chatbots and search engines.
Let's see why this partnership could be a big deal for Nvidia.
Nvidia is about to tap another major AI niche with the Snowflake partnership
Nvidia is the dominant force in AI hardware, as its graphics cards reportedly control 95% of the market for processors used for training machine learning models, according to New Street Research. This terrific market share is the reason why Nvidia is on track to deliver outstanding growth in the current quarter, with the company's revenue expected to jump 64% year over year to $11 billion.
Nvidia is pushing the envelope further in AI hardware with its Grace server processors, which could unlock another massive opportunity for the chipmaker. And now Nvidia has trained its sights on the data side of the AI market by partnering with Snowflake. This could be a big opportunity, as AI models are trained using huge amounts of data.
Nvidia points out that LLMs "can recognize, summarize, translate, predict and generate text and other forms of content based on knowledge gained from massive datasets," which is why they are the pillars of generative AI apps such as conversational chatbots and search engines. Not surprisingly, Nvidia CEO Jensen Huang points out that "data is essential to creating generative AI applications."
This is where the company's partnership with Snowflake is going to come into play, as the latter is a provider of data storage, processing, and analytics solutions. Snowflake acts as a cloud-based data warehouse where its customers can store huge datasets, which they can then use to generate insights and make predictions, among other things.
Snowflake is now fusing its huge bank of proprietary data with Nvidia's NeMo platform, which the latter says is "an end-to-end, cloud-native enterprise framework to build, customize, and deploy generative AI models with billions of parameters." As a result, Snowflake and Nvidia have now created what they call an "AI factory," which will allow enterprises to create custom generative AI models using their own proprietary data within the security of the Snowflake Data Cloud.
Here's how Nvidia could benefit
One might ask how Nvidia is going to make money out of this. Well, the company is known to charge perpetual license fees, annual license fees, and hourly usage rates for its AI enterprise software suite.
Snowflake had a base of nearly 8,200 customers at the end of its fiscal 2024 first quarter (which ended on April 30, 2023), which means Nvidia can sell its AI enterprise suite to a sizable number of Snowflake customers. It is worth noting that Snowflake's customer base increased an impressive 29% year over year during the quarter.
More importantly, it wouldn't be surprising to see Snowflake customers adopting Nvidia's AI software platform, as they have been spending more money on the former's cloud platform. That's evident from Snowflake's dollar-based net revenue retention rate of 151% last quarter. This metric compares the product revenue generated by Snowflake customers at the end of a particular period to the revenue generated by the same cohort of customers in the prior-year period.
A reading of more than 100% indicates that Snowflake customers adopted more of its offerings or increased their usage of its solutions. And now that they have a way to harness the power of Nvidia's platform to develop custom generative AI solutions, it won't be surprising to see them open their wallets further. As a result, both Snowflake and Nvidia are likely to benefit from the adoption of generative AI applications by the former's customer base.
Given that the demand for generative AI software is expected to jump 10 times over the next five years to $36 billion in 2028, according to S&P Global Market Intelligence, Nvidia and Snowflake could be at the beginning of a massive growth opportunity. More importantly, success in the software and data side of the AI market could give Nvidia's earnings power a nice boost and help the company outperform Wall Street's expectations in the long run.
Analysts are forecasting Nvidia's earnings to increase at an annual pace of 20% over the next five years. But Nvidia's terrific pricing power in AI hardware and the company's focus on taking advantage of the non-hardware side of this lucrative market could help it easily exceed analysts' expectations in the long run, and that could help this AI stock fly higher.
