Nvidia (NVDA) saw a slight drop in early trading on Monday, falling 1.6% to $187.45. The broader tech sector showed weakness as the Nasdaq Composite slipped 0.4%. Other major chipmakers also struggled: Advanced Micro Devices (AMD) lost 0.8%, and Broadcom (AVGO) fell 1.2%.

Investors appear cautious after reports that Nvidia agreed to pay $20 billion for a license from AI chip start-up Groq.

What the Groq Deal Means

Nvidia’s deal with Groq involves a nonexclusive license for Groq’s AI chip technology, along with plans to hire several key Groq employees. Groq specializes in chips designed for AI inference tasks, which generate output from trained AI models.

Groq calls its chips LPUs (language processing units). The start-up was last valued at $6.9 billion during a $750 million funding round in September. The jump to a $20 billion valuation in the Nvidia deal has raised eyebrows among analysts.

“It is unclear what caused the rapid increase to a $20 billion price,” said Seaport Research analyst Jay Goldberg. Goldberg, one of the few Wall Street analysts with a Sell rating on Nvidia, has a price target of $140.

Analysts Question the Price

Some analysts are skeptical about whether Groq’s technology justifies the reported valuation.

• D.A. Davidson’s Alex Platt pointed out that Groq’s current chips have limited memory capacity, making them unsuitable for many AI inference tasks. He suggested Nvidia might find better alternatives in the market.
• Truist Securities analyst William Stein noted that although $20 billion is a large sum relative to Groq’s estimated revenue of $90 million to $500 million, the deal is still manageable for Nvidia. It represents less than half of Nvidia’s net cash and less than projected free cash flow for the quarter.

Stein added that Groq’s leadership previously worked on Google’s Tensor Processing Units (TPUs), so Groq’s LPUs could offer low latency and energy-efficient performance for large-scale AI inference. This could give Nvidia a competitive edge in high-volume AI applications.

Strategic Move for Nvidia

While this deal is not a full acquisition. Groq will continue operating independently, it may be a strategic defensive move. Nvidia could be aiming to protect its lead in AI chips as competition from Google and other players heats up. By integrating Groq’s technology, Nvidia might enhance its appeal to major AI customers.

Final Thoughts

The Nvidia-Groq deal highlights how high-stakes the AI chip market has become. While some analysts question the valuation, others see it as a smart investment in Nvidia’s long-term competitive positioning. Investors should monitor the development closely, especially as AI adoption accelerates across industries.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always do your own research before making investment decisions.