Nvidia Is Opening Its NVLink Technology to Others: But Is That Bullish or Bearish for the Stock?

Nvidia announced NVLink Fusion, opening its NVLink technology to systems beyond Nvidia chips, including custom ASICs and non-Grace CPUs, partnering with companies like Marvell, Fujitsu, and Qualcomm. This move aims to expand Nvidia's networking market and address the rising adoption of custom AI accelerators by cloud giants, as Nvidia's networking revenue lags chip sales and custom ASICs gain market share from GPUs. While potentially limiting future hypergrowth of Nvidia GPU sales at high margins, NVLink Fusion allows Nvidia to tap into ASIC-based systems and generate incremental revenue.

Analysis

Nvidia's recent announcement of NVLink Fusion, a strategic initiative to open its proprietary NVLink interconnect technology to non-Nvidia chipsets, including custom ASICs and CPUs from partners like Marvell Technologies, Fujitsu, and Qualcomm, marks a significant tactical shift. This move is primarily driven by two factors: firstly, an effort to stimulate its data center networking division, which saw a 9% year-over-year revenue decline last quarter, contrasting sharply with the 116% growth in its data center semiconductor revenue, and to proactively address competition from emerging open-source interconnect alternatives such as UALink and the Ultra Ethernet Consortium. Secondly, NVLink Fusion represents Nvidia's adaptation to the accelerating trend of custom ASIC adoption by large cloud providers, who can significantly reduce costs by designing their own chips. The market share for these custom ASICs is projected to expand from approximately 22% in 2023 to 30% by 2025, while GPUs are expected to see their share decrease from about 72% in 2023 to a projected 65% in 2024. While opening NVLink provides Nvidia an avenue to generate incremental revenue from these non-Nvidia systems and maintain a presence in a changing hardware landscape, it also implicitly acknowledges the growing competitive pressures that could moderate the sustained hypergrowth and high gross margins (around 75%) previously anticipated for its GPU business, despite the overall AI infrastructure market's continued expansion.

Key Decisions for Investors

• Investors should interpret NVLink Fusion as a strategic adaptation by Nvidia to enhance its networking revenue and engage with the expanding custom ASIC ecosystem, which could partially mitigate risks from moderating GPU market share dominance.
• Carefully monitor Nvidia's subsequent quarterly networking revenues for tangible signs of NVLink Fusion adoption and market penetration, alongside tracking the growth trajectory of custom ASICs within major cloud infrastructure and the competitive impact of open-source interconnect standards.
• It may be prudent to reassess long-term projections for Nvidia's GPU segment growth rates and margin sustainability, given the company's acknowledgment of increasing competition from custom silicon, even as the broader AI market continues to grow.
• Evaluate potential opportunities in Nvidia's key partners for NVLink Fusion, such as Marvell Technology (MRVL), which could benefit from the increased integration of this technology with custom ASICs and third-party CPUs.