Diversifying Your Semiconductor Portfolio Beyond Nvidia

By Nick Frasse, Associate Product Manager

Nvidia's AI chip dominance is under siege from AMD, Intel, startups, and tech giants, as new technologies emerge to disrupt the market and investor expectations.

Semiconductor chips are crucial in artificial intelligence (AI), fueling everything from vast data centers to small edge computing devices. Nvidia has established itself as the leader in this field, particularly with its innovative H100 and most recent launch, Blackwell B200 GPUs. These products have helped Nvidia secure a dominant position in the AI chip market. However, as with all technology, the landscape is inherently dynamic, and new competitors are emerging to challenge Nvidia's supremacy.

Challengers Chip at Nvidia's Edge: Rising Competitors

A mix of established names and nimble startups challenges Nvidia's dominance in the semiconductor sector. Advanced Micro Devices (AMD), its closest competitor, is gaining ground with its MI300 GPUs, designed to compete directly with Nvidia’s offerings. Intel, another heavyweight that has lagged in the last decade, is making significant strides with its Gaudi 3 chips, promising superior performance and energy efficiency compared to Nvidia’s products.

Beyond these well-known players, many startups are also entering the fray. Companies like Cerebras Systems and Groq are introducing innovative technologies that promise to revolutionize AI chip performance and efficiency. Cerebras has developed the most significant commercial chip ever made, significantly accelerating large AI models' processing capabilities. Meanwhile, Groq focuses on delivering speedy processing times for AI tasks, claiming performance that surpasses Nvidia's latest products.

This innovation indicates a shift in the semiconductor industry, suggesting that Nvidia’s position, while strong, may not be as unassailable as it once seemed. For investors, this growing competition implies potential disruption for Nvidia as market dynamics evolve.

AI Data Server Revenue for Nvidia, Intel & AMD (2021-2023)

Source: Nvidia, February 2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

Tech Giants Forge Own Chip Paths: Impacting the Semiconductor Industry

One of the most significant factors influencing the semiconductor industry is the current imbalance between supply and demand. Nvidia has benefited from this scenario, selling its high-performance chips at a premium to enterprise clients desperate to meet the escalating demand for AI capabilities. However, this supply constraint is prompting major tech companies to develop semiconductor solutions.

For instance, tech giants like Amazon and Google are not only significant consumers of Nvidia chips. Still, they are also investing heavily in their chip development projects to reduce reliance on external suppliers like Nvidia. This move towards self-sufficiency could lead to a more balanced supply-demand equation in the semiconductor market. As more companies enter the chip manufacturing space, the increased supply could lead to more competitive pricing, potentially impacting Nvidia's profit margins.

Additionally, geopolitical and economic factors could be critical in shaping the semiconductor industry. Trade policies, international relations, and global economic conditions can all affect chip manufacturing and distribution, influencing prices and availability globally. These factors, combined with the technological shifts within the industry, suggest a future where Nvidia may face more competitive pressures, making a solid case for investor diversification.

Diversification Reigns in Chip Race

The VanEck Semiconductor ETF (SMH) offers investors a strategic avenue to gain exposure to the broader semiconductor sector, including companies like AMD, Intel, and other players in the AI chip market. This diversified approach allows investors to capitalize on the sector's growth while aiming to mitigate the risks associated with the performance of any single name.

SMH provides a diversified portfolio of established leaders and a range of other players in the semiconductor industry. As the market for AI chips grows and evolves, we believe SMH benefits from a team of winners.

Revenues in the Semiconductor Space are Broadly Diversified (2019-2023)

Source: Gartner, January 2024. Past performance is no guarantee of future results. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.

As we observe the continuing advancements and shifts in the semiconductor industry, no single company will likely dominate indefinitely. The AI chip market is set to become increasingly competitive, and investing broadly in the sector helps investors access the space. This approach ensures investors can invest in cutting-edge technology while maintaining a diversified stance in a traditionally volatile asset class.

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Disclosures

Nvidia Corp is 20.30% of SMH net assets as of 4/23/24.

Advanced Micro Devices Inc is 3.95% of SMH net assets as of 4/23/24.

Intel Corp is 3.79% of SMH net assets as of 4/23/24.

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