Nvidia, AI and U.S. Innovation

PHOTO: DADO RUVIC/REUTERS
PHOTO: DADO RUVIC/REUTERS

Summary

The government didn’t build that $2 trillion share valuation.

What a wild ride. Nvidia’s stock price soared another 16% on Thursday after a blowout earnings report, giving the Silicon Valley chip maker a $1.9 trillion market valuation. Markets can get over-exuberant, but Nvidia’s surge may reflect a rational optimism in the vast potential of artificial intelligence.

Five years ago Nvidia was mostly known as a graphics and video-game chip maker. Its roughly $100 billion market valuation was less than half as much as integrated chip-maker Intel’s. Few investors foresaw Nvidia’s transformation into the world’s leading chip firm—or the way artificial intelligence would emerge.

Nvidia designs about 80% of the chips that power a growing array of advanced AI applications—from chatbots to deep neural networks that can discern subtle patterns from data. OpenAI pioneered the technology with ChatGPT, and Microsoft, Amazon and Google rank among Nvidia’s biggest customers. But hardly an industry won’t be changed by AI.

Retailers are using AI to make logistics more efficient and improve the customer experience. Drug makers are using the technology to develop new treatments and determine which patients would benefit most from medicines. Healthcare systems are putting AI assistants to work filling out health records so doctors can focus on patients.

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The AI boom may partly explain why business investment and economic growth haven’t crumbled under the Biden regulatory fusillade. President Biden loves to flog federally funded factories and public works, but software investment has contributed more to GDP growth in the last three years than structures or equipment—no thanks to government.

Some worry about AI’s impact on workers, and jobs will be lost. But others will be created and the U.S. has some nine million job openings. As the workforce ages, bigger productivity improvements will be needed to boost living standards. In any case, white-collar employees will probably face more disruption than workers who use their hands.

Mr. Biden is lucky that the AI revolution accelerated under his watch, just as Barack Obama was fortunate with the shale fracking boom. But AI advances are happening despite government, not because of it. Mr. Biden’s executive order last autumn has created new uncertainty about whether and how regulators will permit AI.

Silicon Valley startup accelerator Y Combinator is instructing founders in health care to “take the conservative approach" and “document everything, and know [evolving regulations are] a risk, and anyone who invests in you should know it’s a risk," as StatNews reported this week. Regulatory risk is something ebullient Nvidia investors might keep in mind too.

Some Democrats are already threatening to suffocate AI with—what else?—climate regulation. Democratic Senators this month introduced a bill that would direct the National Institute of Standards and Technology to recommend administrative actions to mitigate AI’s environmental impact. Will ChatGPT soon need an Environmental Protection Agency permit?

Progressives fret that AI systems will generate as much CO2 emissions as entire countries. Possibly. An AI-driven web search consumes four to five times as much energy as a conventional one. Can the U.S. electric grid, already creaking under the force-fed green energy transition, handle the increasing demand? Is anyone in government thinking about this?

Nvidia’s nearly $2 trillion valuation is essentially a giant bet on U.S. private innovation. China has spent tens of billions of dollars trying to create a national chip-making champion to no avail. Note to Congress and President Biden: Industrial policy doesn’t make countries or businesses great.

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