Last week, reports from Bloomberg, Reuters, and CNBC presented some conflicting details regarding a supposed U.S. Department of Justice (DOJ) subpoena issued to Nvidia (NASDAQ: NVDA) as part of an alleged antitrust investigation. Nvidia’s public relations team denies that the company has been subpoenaed, but the mere idea of such action led to some selling activity for the semiconductor stock since the news was first reported on Sept. 4.
While clear information about what is going on is minimal right now, it might be useful for investors (or potential investors) to take a closer look at the situation and think about what could happen if the DOJ does announce a formal investigation of Nvidia and/or takes action against the company.
As a thought experiment, let’s look at how a government investigation might affect Nvidia’s business in the short and long terms, and at how investors might want to think about the company’s prospects if such an investigation is going on. I’ve got three hot takes regarding this story and where it may lead.
Hot take No. 1: Nvidia is likely to face some setbacks
Nvidia is a somewhat diversified enterprise, but the overwhelming majority of its business right now is focused on high-performance chipsets called graphics processing units (GPUs). GPUs have loads of applications and are traditionally used to process the display of high-level graphics visuals in computer and video games. GPUs can also be used in data centers and be put to work training large language models (LLMs) in artificial intelligence (AI) applications.
Nvidia’s H100, A100, and new Blackwell series GPUs are used by some of the world’s largest and most influential companies. Tech giants like Tesla, Meta Platforms, Microsoft, Alphabet, and Amazon are some of Nvidia’s largest customers.
Nvidia also has a lesser-known (but just as important) software platform that is vital to the success of its GPUs. The company’s compute unified device architecture (CUDA) software integrates with and works in parallel to its GPU chips. The proprietary software’s “language” has become a leading industry standard that many technology engineers are trained on. This software integration is important for the GPUs’ performance and its success has helped Nvidia gain control of about 88% of the GPU market as of early 2024, according to Jon Peddie Research.
Because Nvidia GPUs and its CUDA architecture are so integrated, it’s difficult for customers to incorporate GPU products from competitors into any combined operation. You can use other software and other GPUs, but it won’t operate as efficiently, and finding software engineers who know how to use the other software well is much harder (and more expensive).
Based on my investigations, incorporating an ability to run CUDA on GPUs made by Advanced Micro Devices or Intel has not been a major focus point for Nvidia. From a competition standpoint, it’s pretty clear why.
From a government regulator’s perspective, Nvidia’s sales practices which strongly encourage CUDA software to be used in conjunction with its GPU hardware could be seen as self-dealing and purposely meant to stifle competition. Since industry research suggests that Nvidia holds an overwhelming majority of the market for GPU sales, it’s reasonable to consider the idea that the company may be benefiting illegally from its monopoly position.
If the government were to take some kind of action against Nvidia, I see a few ways the company could be affected.
For starters, Nvidia could be forced to loosen its ecosystem so that CUDA can integrate more seamlessly with hardware made by other chip makers. If Nvidia is forced to allocate some research and development expenses toward services that work with the competition, that takes away resources that could be used for its own innovation and next-generation products.
In turn, these actions could lead to less demand for Nvidia’s GPUs, which would decelerate revenue growth and eat away at the company’s market share.
Image source: Getty Images.
Hot take No. 2: The setbacks will be brief and end up inspiring long-term growth
While hot take No. 1 might create some initial panic over Nvidia’s long-term prospects, I actually think government intervention might not spell disaster for the company. Even though growth could slow as customers migrate away from such a heavy reliance on Nvidia, I see this as largely a short-term issue. Why? Because increased competition breeds innovation.
Should Nvidia start developing more products that are congruent with hardware from other chip makers, the company’s potential to form new partnerships and strategic alliances will rise. In turn, Nvidia could actually increase its network of developers in industries or geographic areas that the company may not have a strong presence in today.
As a result, Nvidia could actually be better off in the long term by diversifying its ecosystem.
Hot take No. 3: This isn’t a big deal because AI is here for the long run, and so is Nvidia
In all likelihood, an investigation will probably go on for several months (maybe even years), and there’s a real possibility that nothing material will come from it. Moreover, let’s not forget that this isn’t Nvidia’s first rodeo with antitrust concerns and government intervention.
Of course, I’m talking about the company’s failed acquisition attempt of Arm Holdings back in 2020, which was also seen as an anti-competitive move. Despite abandoning the deal in 2022 — and all the legal costs that came with it — Nvidia seems to be doing more than OK, as I’ve outlined above.
The artificial intelligence revolution is very much in its early days. While Nvidia is seen as the 800-pound gorilla in the chip market today, things could change at the flip of a switch. For now, I would not worry too much about whether or not the DOJ subpoenas Nvidia or takes some sort of action following an investigation.
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