Tag: Microsoft Corporation

Big Tech’s In-House AI Chips: A Threat to Nvidia’s Data Center Revenue

Posted on by The INO.com Team

Nvidia Corporation (NVDA) has long been the dominant player in the AI-GPU market, particularly in data centers with paramount high-compute capabilities. According to Germany-based IoT Analytics, NVDA owns a 92% market share in data center GPUs.

Nvidia’s strength extends beyond semiconductor performance to its software capabilities. Launched in 2006, CUDA, its development platform, has been a cornerstone for AI development and is now utilized by more than 4 million developers.

The chipmaker’s flagship AI GPUs, including the H100 and A100, are known for their high performance and are widely used in data centers to power AI and machine learning workloads. These GPUs are integral to Nvidia’s dominance in the AI data center market, providing unmatched computational capabilities for complex tasks such as training large language models and running generative AI applications.

Additionally, NVDA announced its next-generation Blackwell GPU architecture for accelerated computing, unlocking breakthroughs in data processing, engineering simulation, quantum computing, and generative AI.

Led by Nvidia, U.S. tech companies dominate multiple facets of the burgeoning market for generative AI, with market shares of 70% to over 90% in chips and cloud services. Generative AI has surged in popularity since the launch of ChatGPT in 2022. Statista projects the AI market to grow at a CAGR of 28.5%, resulting in a market volume of $826.70 billion by 2030.

However, NVDA’s dominance is under threat as major tech companies like Microsoft Corporation, Meta Platforms, Inc. (META), Amazon.com, Inc. (AMZN), and Alphabet Inc. (GOOGL) develop their own in-house AI chips. This strategic shift could weaken Nvidia’s grip on the AI GPU market, significantly impacting the company’s revenue and market share.

Let’s analyze how these in-house AI chips from Big Tech could reduce reliance on Nvidia’s GPUs and examine the broader implications for NVDA, guiding how investors should respond.

The Rise of In-house AI Chips From Major Tech Companies

Microsoft Azure Maia 100

Microsoft Corporation’s (MSFT) Azure Maia 100 is designed to optimize AI workloads within its vast cloud infrastructure, like large language model training and inference. The new Azure Maia AI chip is built in-house at Microsoft, combined with a comprehensive overhaul of its entire cloud server stack to enhance performance, power efficiency, and cost-effectiveness.

Microsoft’s Maia 100 AI accelerator will handle some of the company’s largest AI workloads on Azure, including those associated with its multibillion-dollar partnership with OpenAI, where Microsoft powers all of OpenAI’s workloads. The software giant has been working closely with OpenAI during the design and testing phases of Maia.

“Since first partnering with Microsoft, we’ve collaborated to co-design Azure’s AI infrastructure at every layer for our models and unprecedented training needs,” stated Sam Altman, CEO of OpenAI. “Azure’s end-to-end AI architecture, now optimized down to the silicon with Maia, paves the way for training more capable models and making those models cheaper for our customers.”

By developing its own custom AI chip, MSFT aims to enhance performance while reducing costs associated with third-party GPU suppliers like Nvidia. This move will allow Microsoft to have greater control over its AI capabilities, potentially diminishing its reliance on Nvidia’s GPUs.

Alphabet Trillium

In May 2024, Google parent Alphabet Inc. (GOOGL) unveiled a Trillium chip in its AI data center chip family about five times as fast as its previous version. The Trillium chips are expected to provide powerful, efficient AI processing that is explicitly tailored to GOOGL’s needs.

Alphabet’s effort to build custom chips for AI data centers offers a notable alternative to Nvidia’s leading processors that dominate the market. Coupled with the software closely integrated with Google’s tensor processing units (TPUs), these custom chips will allow the company to capture a substantial market share.

The sixth-generation Trillium chip will deliver 4.7 times better computing performance than the TPU v5e and is designed to power the tech that generates text and other media from large models. Also, the Trillium processor is 67% more energy efficient than the v5e.

The company plans to make this new chip available to its cloud customers in “late 2024.”

Amazon Trainium2

Amazon.com, Inc.’s (AMZN) Trainium2 represents a significant step in its strategy to own more of its AI stack. AWS, Amazon’s cloud computing arm, is a major customer for Nvidia’s GPUs. However, with Trainium2, Amazon can internally enhance its machine learning capabilities, offering customers a competitive alternative to Nvidia-powered solutions.

AWS Trainium2 will power the highest-performance compute on AWS, enabling faster training of foundation models at reduced costs and with greater energy efficiency. Customers utilizing these new AWS-designed chips include Anthropic, Databricks, Datadog, Epic, Honeycomb, and SAP.

Moreover, Trainium2 is engineered to provide up to 4 times faster training compared to the first-generation Trainium chips. It can be deployed in EC2 UltraClusters with up to 100,000 chips, significantly accelerating the training of foundation models (FMs) and large language models (LLMs) while enhancing energy efficiency by up to 2 times.

Meta Training and Inference Accelerator

Meta Platforms, Inc. (META) is investing heavily in developing its own AI chips. The Meta Training and Inference Accelerator (MTIA) is a family of custom-made chips designed for Meta’s AI workloads. This latest version demonstrates significant performance enhancements compared to MTIA v1 and is instrumental in powering the company’s ranking and recommendation ads models.

MTIA is part of Meta’s expanding investment in AI infrastructure, designed to complement its existing and future AI infrastructure to deliver improved and innovative experiences across its products and services. It is expected to complement Nvidia’s GPUs and reduce META’s reliance on external suppliers.

Bottom Line

The development of in-house AI chips by major tech companies, including Microsoft, Meta, Amazon, and Alphabet, represents a significant transformative shift in the AI-GPU landscape. This move is poised to reduce these companies’ reliance on Nvidia’s GPUs, potentially impacting the chipmaker’s revenue, market share, and pricing power.

So, investors should consider diversifying their portfolios by increasing their exposure to tech giants such as MSFT, META, AMZN, and GOOGL, as they are developing their own AI chips and have diversified revenue streams and strong market positions in other areas.

Given the potential for reduced revenue and market share, investors should re-evaluate their holdings in NVDA. While Nvidia is still a leader in the AI-GPU market, the increasing competition from in-house AI chips by major tech companies poses a significant risk. Reducing exposure to Nvidia could be a strategic move in light of these developments.

How Alibaba's 3% Reduction in Outstanding Shares Affects the Stock's Future

Posted on by The INO.com Team

During the 12 months ended December 31, 2023, Alibaba Group Holding Limited (BABA) repurchased a total of 897.9 million ordinary shares for $9.5 billion. This includes the purchase of 292.7 million ordinary shares for a total of $2.9 billion during the fourth quarter.

The shares were purchased in both the U.S. and Hong Kong markets under its share repurchase program, the company said in a filing.

The Chinese e-commerce giant said that it had 20 billion ordinary shares outstanding as of December 31, 2023, compared to 20.7 billion ordinary shares from December 31, 2022. This indicates a net reduction of 3.3% in its outstanding shares.

The remaining amount that the company’s Board had authorized for its share repurchase program, which is effective through March 2025, was $11.7 billion as of December 31, 2023.

When a company buys back its own shares from the marketplace, it reduces the total number of shares outstanding. As a result, the value of the remaining shares increases. The company’s Board may feel that its shares are undervalued, making it a favorable time to purchase them. Meanwhile, investors often perceive a buyback as an expression of confidence by the management.

Therefore, in the case of Alibaba, a more than 3% reduction in outstanding shares will positively impact its shareholder value and give a significant boost to the stock’s performance this year.

Now, let’s review several other factors that could influence BABA’s performance in the near term:

Strategic Reorganization

Last year in March, BABA announced plans to split its business into six independent units in a strategic move to unlock shareholder value and advance competitiveness.

“This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes,” said Daniel Zhang, former CEO and chairman of Alibaba Group.

Under the restructuring, Alibaba will be split up into six newly formed business units: Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, International Digital Commerce Group, and Digital Media and Entertainment Group.

Each business unit will be overseen by its own chief executive and board of directors. Five of the new business clusters “will also have the flexibility to raise outside capital and potentially to seek its own IPO,” the company said.

As per the latest update on business group spin-offs and capital raisings, the recent expansion of U.S. restrictions on the export of advanced computing chips has created uncertainties for the Cloud Intelligence Group’s prospects.

The company believes that a complete spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement. Correspondingly, it decided not to proceed with a full spin-off and instead will focus on developing a sustainable growth model for Cloud Intelligence Group under fluid circumstances.

In terms of Alibaba International Digital Commerce Group, it is in preparation for external fundraising. Further, Cainiao Smart Logistics Network Limited applied for an initial public offering in Hong Kong and submitted its AI filing to the Hong Kong Stock Exchange.

Capitalizing on the AI Boom

BABA’s newly appointed CEO, Eddie Wu, stressed putting AI and user experience at the top of the company’s priorities to reclaim customers and market share in an immensely competitive arena.

“Over the next decade, the most significant change agent will be the disruptions brought about by AI across all sectors,” Wu said in his note, reviewed by Bloomberg News. “If we don’t keep up with the changes of the AI era, we will be displaced.”

Wu added that Alibaba will reinforce strategic investments in the areas of AI-driven tech businesses, internet platforms, and its global commerce network.

On January 9, 2024, Alibaba.com, a leading platform for global B2B e-commerce and part of Alibaba International Digital Commerce Group, introduced its latest Smart Assistant features powered by AI at CES in Las Vegas, NV.

The Smart Assistant is an AI-powered sourcing tool that caters to newcomers and seasoned entrepreneurs in the dynamic world of global commerce, helping them discover new opportunities, stay up-to-date on trends, seamlessly track orders and more in a single, efficient touchpoint.

Also, in October 2023, Alibaba launched an upgraded version of its AI model as the Chinese tech giant looks to challenge its U.S. rivals, including Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT).

BABA launched Tongyi Qianwen 2.0, its latest large language model (LLM). Tongyi Qianwen 2.0 “demonstrates remarkable capabilities in understanding complex instructions, copywriting, reasoning, memorizing, and preventing hallucinations,” the company said. 

Alibaba stated that Tongyi Qianwen 2.0 is a “substantial upgrade from its predecessor,” which was introduced in April. Also, the Hangzhou-based company announced the GenAI Service Platform, which allows companies to build their own generative AI applications using their own data.  

Solid Last Reported Financials

For the fiscal 2024 second quarter that ended September 30, 2023, BABA reported revenue of $31.04 billion, an increase of 8.5% year-over-year. The revenue slightly surpassed analysts’ estimate of $30.84 billion. Alibaba International Digital Commerce Group rose 53% year-over-year, while Cainiao Smart Logistics Network Limited and Local Services Group grew 25% and 16%, respectively.

Alibaba’s income from operations increased 33.6% from the year-ago value to $4.60 billion. The company’s adjusted EBITDA came in at $6.75 billion, up 13.7% from the prior year’s quarter. Also, its adjusted EBITA rose 18% year-over-year to $5.87 billion, primarily contributed by revenue growth and improved operating efficiency.

Furthermore, the Chinese tech giant’s non-GAAP net income for the quarter came in at $5.51 billion, an increase of 18.8% from the prior year’s period. It posted non-GAAP net income per share of $2.16, compared to the consensus estimate of $2.09, and up 21% year-over-year.

As of September 30, 2023, Alibaba’s cash and cash equivalents, short-term investments and other treasury investments, included in equity securities and other investments on the consolidated balance sheets, were $85.60 billion. During the quarter ended September 30, 2023, cash inflows from operating activities were $6.75 billion, up 4% from the same quarter of 2022.

Also, the company’s free cash flow was $6.20 billion, an increase of 27% year-over-year.

Impressive Historical Growth

Over the past five years, BABA’s revenue and EBITDA grew at CAGRs of 24.1% and 15.5%, respectively. The company’s net income and EPS rose at respective CAGRs of 17% and 17.3% over the same timeframe. Its levered free cash flow improved at 8.2% CAGR over the same period.

Moreover, the company’s tangible book value and total assets increased at CAGRs of 34.2% and 17% over the same timeframe, respectively.

Favorable Analyst Estimates

Analysts expect BABA’s revenue for the fiscal year (ending March 2024) to grow 8% year-over-year to $133.38 billion. The consensus EPS estimate of $9.20 for the ongoing year indicates an 18.6% year-over-year increase. Moreover, Alibaba has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

For the fiscal year 2025, the company’s revenue and EPS are expected to increase 8.9% and 7.8% from the previous year to $145.27 billion and $9.92, respectively.

Low Valuation

In terms of forward non-GAAP P/E, BABA is currently trading at 7.83x, 50.1% lower than the industry average of 15.68x. The stock’s forward EV/Sales of 1.11x is 10.7% lower than the industry average of 1.24x. Likewise, its forward EV/EBITDA of 5.17x is 48.2% lower than the industry average of 9.99x.

In addition, the stock’s forward Price/Book multiple of 1.18 is 53.8% lower than the industry average of 2.55. Also, its forward Price/Cash Flow of 7.20x is 27.2% lower than the industry average of 9.88x.

Robust Profitability

BABA’s trailing-12-month EBIT margin of 14.66% is 92.9% higher than the 7.60% industry average. Moreover, the stock’s trailing-12-month levered FCF margin and net income margin of 14.17% and 56.87% are considerably higher than the industry averages of 5.37% and 4.52%, respectively.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 13.35%, 6.34% and 7.32% favorably compared to the respective industry averages of 11.40%, 6.05%, and 4%. Also, its trailing-12-month gross profit margin of 37.73% is 6.6% higher than the industry average of 35.38%.

Stock Upgrades

On November 24, 2023, Goldman Sachs analyst Ronald Keung maintained a Buy rating on BABA shares, with a price target of $134, suggesting that shares are anticipated to surge by nearly 73% over the coming year. The analyst stated that its FCF generation will fund ongoing buybacks and dividends. Also, he continues to view the stock’s valuation as attractive.

Bottom Line

BABA beat second-quarter analyst expectations for earnings and revenue. Revenue grew approximately 9% year-over-year in the last reported quarter, and the company posted expanded margins as its income from operations rose an impressive 24%. Also, the stock’s valuation is extremely attractive.

Alibaba further pleased its investors with last year’s announcement of plans to split its business into six separate units in a move to unlock more shareholder value and foster competitiveness. Also, the company continues to leverage AI across its operations. Its AI-powered systems optimize its pricing, marketing, and logistics, ultimately resulting in enhanced user experience.

As per Statista, the AI market in China is projected to reach a staggering $38.89 billion in 2024. In global comparison, the largest market will be in the U.S. ($106.50 billion this year). China’s AI market is further expected to show a CAGR of 18%, resulting in a market volume of $104.70 billion by 2030.

Alibaba’s AI leadership positions it to capitalize on the significant growth potential of the Chinese AI market. Also, the company has introduced its upgraded AI model to compete with its U.S. rivals, such as AMZN and MSFT.

“Through a more flexible organizational governance mechanism, we aim to capture brand new opportunities from the ongoing AI technological transformation and create more value for our customers,” said CEO Eddie Wu in BABA’s latest earnings release.

Notably, Alibaba’s 3.3% reduction in its outstanding shares because of a share buyback program will further create a greater value for its shareholders. Given BABA’s solid financials, accelerating profitability, attractive valuation, and bright growth prospects, this tech stock appears an ideal buy now.