BREAKINGVIEWS-Nvidia’s Groq deal muddies cheap challengers’ path

By Jonathan Guilford

NEW YORK, Dec 26 (Reuters Breakingviews) - Nvidia NVDA.O just made it harder for would-be rivals to infer the future. The $4.6 trillion chip titan, despite boss Jensen Huang’s sometimes-dismissive comments about rival technologies, on Christmas Eve struck a licensing deal with upstart silicon slinger Groq that includes nabbing its top talent. This comes as new rivals, supply snarls, and an increasing focus on cost-effectiveness challenge Nvidia. The deal may scramble the opportunity opened by all three.

The not-quite-acquisition’s oddball structure echoes deals by Microsoft MSFT.O or Amazon.com AMZN.O, who like Nvidia are mindful of formal purchases challenged by antitrust enforcers. At a $20 billion price tag, as CNBC reported, the Groq agreement would be the biggest yet. Even then, it would only represent a third of Nvidia’s cash and short-term investments.

It’s the latest example of Huang putting the company’s heft to work. Nvidia has inked deals – like a $10 billion investment in Claude developer Anthropic – that pump up some of its biggest customers. The company has also extended its reach, investing in former arch-rival Intel and agreeing to co-develop complementary products.

Yet its profitable spot as the maker of must-have AI chips faces challenges. High-bandwidth memory, crucial for shuttling data around, is spiraling in cost and supplies are short. Meanwhile, startups and tech giants alike are pursuing their own silicon designs. Groq’s founder helped spearhead a successful effort at Google, whose chips are now nearly half as expensive for certain tasks as Nvidia’s, Bank of America BAC.N analysts reckon. This is especially important for inference, the task of serving up trained chatbots’ responses, where cost-efficiency is king. As AI usage rises, silicon tuned for this step becomes increasingly appealing.

Groq and peer Cerebras both avoid high-bandwidth memory, and both focus on efficient inference. Success might have helped loosen Nvidia's grip on AI’s biggest market. It’s still largely a theoretical opportunity. Groq was targeting just $500 million in revenue this year after slashing forecasts, The Information reported. Cerebras called off its initial public offering in October, after disclosing most sales came from one customer.

Huang’s deal is a mix of defense and offense. Nvidia gains promising tech that can complement, rather than replace, its products. The implied 40 times sales paid overshadows the 29 times valuation targeted by Cerebras’ botched listing, an awkward point of comparison as that firm potentially preps a retry. To boot, one of Cerebras’ closest peers now has the backing of the world’s biggest company amid a supply crunch. The future of AI was already uncertain. For AI chip designers, Nvidia has made it yet more so.

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CONTEXT NEWS

Semiconductor design company Groq said on December 24 that it had reached a non-exclusive licensing agreement with chipmaker Nvidia. As part of the agreement, members of Groq’s team, including founder Jonathan Ross, will join Nvidia.