Nvidia May Not Stay King of the AI Hill

Abhinav Davuluri: We recently published a report that aims to explain the artificial intelligence opportunity as it pertains to the semiconductor space--specifically, accelerators, which are chips used alongside CPUs to speed up workloads. These workloads run in servers at major cloud vendors such as Amazon, Microsoft, and Google. Today's basic AI examples include Apple's Siri or Google Now, auto tagging in Facebook pictures, or Amazon's recommendation engine. Future AI applications could be self-driving cars or robots performing complex surgeries.

The front-runner and primary accelerator is currently the graphics processing unit, or GPU, which has led to the exponential rise in the stock price of GPU leader Nvidia. We believe the market expects the firm to remain dominant in this space, and our differentiated take stems from our view that alternative solutions tailored to AI will capture share going forward. By 2021, we project the AI accelerator chip market will be $20 billion, with a 93% CAGR over the next five years, as customers purchase more accelerators in lieu of basic server CPUs.

We note GPUs were designed for a different tasks, rendering graphics on PCs, and happened to be the best thing available for acceleration. Though Nvidia capitalized on the opportunity, the first mover in tech doesn't always remain king of the hill. Think the iPod or Facebook, products that came after initial pioneers including MP3 players or Myspace, respectively.

We recently assigned a narrow economic moat for Nvidia, stemming from its intangible assets related to GPU design. We also increased our fair value for Nvidia to $90, but we continue to view shares as materially overvalued, as current levels imply complete dominance over all hardware segments of AI as well as the autonomous vehicle opportunity.

In our view, we expect greater competition in both arenas, specifically from Intel. That being said, Intel is modestly overvalued today, but we'd be avid buyers on any pullback, as the firm boasts a broad AI portfolio, including its latest acquisitions--Altera, Mobileye, and Nervana. Ultimately the ongoing secular decline of PCs tempers our optimism for this wide-moat chipmaker.