Nvidia ruffles tech giants with move into cloud computing

Mint

4 hours ago

Cloud computing generates big profits for Amazon.com, Microsoft and Google. Now that cash cow faces a nascent threat with the rise of artificial-intelligence cloud specialists and a new industry power broker: Nvidia.
AI-chip maker Nvidia launched its own cloud-computing service two years ago called DGX Cloud. It has also nurtured upstarts competing with the big cloud companies, investing in AI cloud players CoreWeave and Lambda.
Those moves have yet to make an enormous dent, but a competitive shift is easy to imagine if computing demand continues to shift toward AI and Nvidia remains the sector's principal arms dealer.
DGX Cloud is already growing fast. UBS analysts estimated when it launched that it could grow into a more than $10 billion annual revenue business. And CoreWeave, which listed shares on the Nasdaq in March, is forecasting around $5 billion of revenue this year.
Those businesses are limited by their narrow focus on AI computing, and they pale in comparison to the more than $107 billion of sales Amazon's market-leading cloud business generated last year.
Yet any challenge in cloud computing would be worrying for Amazon: While the company's cloud division accounted for 29% of its revenue in its latest quarter, it accounted for more than 60% of its operating income thanks to its high margins.
Microsoft and Alphabet's Google, the next two largest cloud companies, have a lot to lose if the cloud-computing landscape shifts, too. Growing macroeconomic concerns are raising caution about IT spending. Google is under antitrust scrutiny in the U.S., and its golden goose—the search engine—is being challenged by OpenAI.
All the big cloud companies effectively offer AI chips for rent, many of them made by Nvidia, which has a market share estimated at around 80%. In what is perhaps a testament to Nvidia's market power, though, the cloud companies are helping Nvidia grow its own cloud business.
Under DGX Cloud's unusual arrangement, the cloud giants buy and manage equipment—including Nvidia's chips—that forms the backbone of the service. Then Nvidia leases back that equipment from them and rents it out to corporate clients. It also offers access to its AI experts and software as part of the package.
That has left cloud-computing giants in an uncomfortable position. While they make money through the arrangement, they are also being asked to help a service that could compete with them. Some of them haven't rushed to participate, even if they do eventually join up; Google was notably absent from a roster of companies participating in a DGX Cloud chip-rental marketplace announced in May.
Roy Illsley, the chief analyst at tech research firm Omdia, said participating made sense for the cloud companies a couple of years ago because their own AI services weren't well-developed, although they have gotten better recently. 'They needed to respond to the market when the AI revolution took off, and what Nvidia did was give them a solution when they hadn't got their own ducks in order," he said.
It isn't clear how big DGX Cloud is—Nvidia doesn't break out its revenue or profits. But the company said in its latest fiscal year that it had $10.9 billion in multiyear cloud service agreements, up from $3.5 billion the year before, in large part to support DGX Cloud. If the service is more than breaking even—a fair bet given usually high cloud-computing profit margins—that is already a fairly sizable business.
Nvidia is adamant that it isn't trying to outshine the cloud-computing giants with DGX Cloud. In the company's telling, it aims to help connect customers with AI computing power and Nvidia's expertise in ways that weren't otherwise possible.
That may be true for now, but it would be naive to think Nvidia doesn't have any further designs. At minimum, DGX Cloud gives Nvidia an option in the future to grow a big cloud business and the power now to help shape how AI is developed. Some of the same logic likely helps drive its investments in CoreWeave and Lambda.
Nvidia has reason to be wary of the durability of its relationships with the existing cloud players, too: As it encroaches on the cloud giants' territory, they are increasingly trespassing on Nvidia's. All of the cloud giants are developing their own custom AI chips that eventually could supplant Nvidia's. That would save them money at the expense of Nvidia's revenue, unless the chip maker can find it somewhere else.
As Nvidia seeks new areas to conquer after its runaway AI success, cloud computing looks increasingly like fertile territory—even if some of its biggest customers may not be thrilled about it.
Write to Asa Fitch at [e-mail]