My 3 thoughts on what could happen if the DOJ takes action against Nvidia

Last week, reports from Bloomberg, Reuters and CNBC presented some conflicting details about an alleged US Department of Justice (DOJ) subpoena issued to Nvidia (NVDA -0.03%) as part of an alleged antitrust investigation. Nvidia’s PR team denies that the company has been subpoenaed, but the mere idea of ​​such an action has led to selling activity for the semiconductor stock since the news was first reported on September 4.

While clear information about what’s going on is minimal at this point, it might be helpful for investors (or potential investors) to take a closer look at the situation and think about what might happen if the DOJ announces a formal investigation into Nvidia and/or take action against the company.

As a thought experiment, let’s look at how a government investigation could affect Nvidia’s business in the short and long term, and how investors might want to think about the company’s prospects if such an investigation takes place. I have three hot ideas about this story and where it might go.

Number 1: Nvidia is likely to face some setbacks

Nvidia is somewhat of a diversified enterprise, but the overwhelming majority of its business right now is focused on high-performance chipsets called graphics processing units (GPUs). GPUs have many applications and are traditionally used to process the display of high-level graphics in computer and video games. GPUs can also be used in data centers and put to work for training large language models (LLMs) in artificial intelligence (AI) applications.

Nvidia H100, A100 and new Blackwell series GPUs are used by some of the biggest and most influential companies in the world. Tech giants like adze, Meta platforms, Microsoft, Alphabetand Amazon are some of Nvidia’s biggest customers.

Nvidia also has a lesser-known (but equally important) software platform that is vital to the success of its GPUs. The company’s Compute Unified Device Architecture (CUDA) software integrates and works in parallel with its GPU chips. The “language” of proprietary software has become a leading industry standard in which many technology engineers are trained. This software integration is important to GPU performance, and its success has helped Nvidia gain control of about 88 percent of the GPU market by early 2024, according to Jon Peddie Research.

Because Nvidia GPUs and its CUDA architecture are so integrated, it is 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 work as efficiently, and finding software engineers who know how to use the other software well is much more difficult (and expensive).

Based on my investigations, incorporating an ability to run CUDA on GPUs made by Advanced microdevices or Intel it wasn’t a major point of interest for Nvidia. From a competitive standpoint, it’s pretty clear why.

From the perspective of government regulators, Nvidia’s sales practices, which strongly encourage CUDA software to be used with its GPU hardware, could be seen as self-dealing and intentionally designed to stifle competition. Since industry research suggests that Nvidia has an overwhelming majority of the GPU sales market, it is reasonable to consider the idea that the company may be illegally benefiting from its monopoly position.

If the government were to take some sort of action against Nvidia, I can see a few ways the company could be hurt.

For starters, Nvidia may be forced to loosen up its ecosystem so that CUDA can integrate more seamlessly with hardware produced by other chipmakers. If Nvidia is forced to allocate some R&D spending to 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 lower demand for Nvidia GPUs, which would slow revenue growth and erode the company’s market share.

Image source: Getty Images.

First 2: Setbacks will be short-lived and end up inspiring long-term growth

While the top spot might create some initial panic about Nvidia’s long-term prospects, I actually think government intervention might not spell disaster for the company. Even though growth may slow as customers migrate away from such a heavy reliance on Nvidia, I see that as a short-term problem. Why? Because increased competition breeds innovation.

If Nvidia starts developing more products that are congruent with hardware from other chipmakers, the company’s potential to form new partnerships and strategic alliances will increase. In turn, Nvidia could actually grow its developer network in industries or geographies where the company might not have a strong presence today.

As a result, Nvidia might actually be better off in the long run by diversifying its ecosystem.

3: This is no big deal because AI is here for the long haul and so is Nvidia

In all likelihood, an investigation will likely take several months (perhaps even years), and there is a real possibility that nothing material will come of it. Also, 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 Arm holds 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 we outlined above.

The AI ​​revolution is in its infancy. 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 wouldn’t worry too much about whether or not the DOJ subpoenas Nvidia or takes some sort of action as a result of an investigation.