Two unnamed clients made up 39% of Q2 revenue

Nvidia has dominated the world chip market once again. Record revenue in the company stands at $46.7 billion in 2011 Quarter ended July 27, which is 56% higher than the same period in 2010. This increase was mostly driven by the increase in demand for AI and data center products. 

Its performance is notable and underscores the extent to which the company has become central to the AI revolution, with its chips deployed in all manner of things, including training large language models as well as driving complex cloud services.

The Mystery of Two Key Customers

The numbers in the headline are impressive, but a filing by Nvidia with the Securities and Exchange Commission showed something out of the ordinary. It had almost 40% of its second quarter revenue through two customers. One of these customers contributed 23% to revenue, and the other contributed 16%. Nvidia did not name them, just calling them customer A and customer B.

This is a high degree of concentration. It implies that the two buyers contributed nearly $18 billion in sales in the quarter. To a firm that provides chips to a great number of various industries, so much dependence upon a few accounts makes it questionable as to stability and long-term balance.

Who Are They Likely To Be?

According to Nvidia, these are direct customers like system integrators, distributors or equipment makers. These companies purchase the chips made by Nvidia and resell them to other companies, usually to cloud service providers or internet giants. 

Due to this, Customer A or Customer B is unlikely to be a large cloud company, such as Microsoft, Amazon, or Google. More likely, however, they are big distributors or system builders reselling the chips to those technology companies.

This introduces an additional complication. Although the cloud companies themselves are not the direct customers of Nvidia, the ultimate customer is the enormous cloud and AI infrastructures underway in Silicon Valley and elsewhere.

Cloud Providers Still Dominate Demand

According to Nvidia Chief Financial Officer Nicole Kress, 50% of Nvidia’s data center business came through large cloud service providers. With data centers projected to constitute 88% of total revenue in the quarter, it is evident that the cloud is at the center of Nvidia’s growth. Companies that are constructing AI infrastructure at scale are purchasing chips in large quantities either directly or via intermediaries.

This demonstrates that, although Nvidia does not necessarily sell directly to the large cloud providers, the needs of these companies drive the success of the company. The cloud players are also in competition to increase capacity and provide AI services, and Nvidia chips are still the gold standard in that regard.

The Risk of Concentration

Relying on two customers is a strength as well as a weakness. On the one hand, such customers obviously have the ability and intent to spend billions on Nvidia products. They are properly financed and will probably keep investing in AI hardware. 

What this concentration implies, on the other hand, is that the revenue of Nvidia could be caught in the crossfire once any of them decides to change their spending abruptly.

Gimme Credit analyst Dave Novosel told Fortune that despite the dangers of concentration, its customers are strong financially, with large cash reserves and good cash flows. They will also continue to invest in data centers in the coming few years, which diminishes the short-term risk to Nvidia.

The Implication of this for the Future of Nvidia.

Nvidia is enjoying an enviable status in the world technology industry. It is the largest AI chip supplier and a key beneficiary of the ongoing computing infrastructure wave. However, the fact that the company depends on a few customers exposes it to radical shifts in purchasing behaviors.

In the future, Nvidia will need to expand its customer base or further cement its relationships with these key accounts to deal with the risks. The company will have even higher demand as AI spending will continue increasing. Investors and analysts will, however, closely monitor what portion of that growth will rely on the few strong buyers.