Monday, 27th January 2025
The impact of competition and DeepSeek on Nvidia (via) Long, excellent piece by Jeffrey Emanuel capturing the current state of the AI/LLM industry. The original title is "The Short Case for Nvidia Stock" - I'm using the Hacker News alternative title here, but even that I feel under-sells this essay.
Jeffrey has a rare combination of experience in both computer science and investment analysis. He combines both worlds here, evaluating NVIDIA's challenges by providing deep insight into a whole host of relevant and interesting topics.
As Jeffrey describes it, NVIDA's moat has four components: high-quality Linux drivers, CUDA as an industry standard, the fast GPU interconnect technology they acquired from Mellanox in 2019 and the flywheel effect where they can invest their enormous profits (75-90% margin in some cases!) into more R&D.
Each of these is under threat.
Technologies like MLX, Triton and JAX are undermining the CUDA advantage by making it easier for ML developers to target multiple backends - plus LLMs themselves are getting capable enough to help port things to alternative architectures.
GPU interconnect helps multiple GPUs work together on tasks like model training. Companies like Cerebras are developing enormous chips that can get way more done on a single chip.
Those 75-90% margins provide a huge incentive for other companies to catch up - including the customers who spend the most on NVIDIA at the moment - Microsoft, Amazon, Meta, Google, Apple - all of whom have their own internal silicon projects:
Now, it's no secret that there is a strong power law distribution of Nvidia's hyper-scaler customer base, with the top handful of customers representing the lion's share of high-margin revenue. How should one think about the future of this business when literally every single one of these VIP customers is building their own custom chips specifically for AI training and inference?
The real joy of this article is the way it describes technical details of modern LLMs in a relatively accessible manner. I love this description of the inference-scaling tricks used by O1 and R1, compared to traditional transformers:
Basically, the way Transformers work in terms of predicting the next token at each step is that, if they start out on a bad "path" in their initial response, they become almost like a prevaricating child who tries to spin a yarn about why they are actually correct, even if they should have realized mid-stream using common sense that what they are saying couldn't possibly be correct.
Because the models are always seeking to be internally consistent and to have each successive generated token flow naturally from the preceding tokens and context, it's very hard for them to course-correct and backtrack. By breaking the inference process into what is effectively many intermediate stages, they can try lots of different things and see what's working and keep trying to course-correct and try other approaches until they can reach a fairly high threshold of confidence that they aren't talking nonsense.
The last quarter of the article talks about the seismic waves rocking the industry right now caused by DeepSeek v3 and R1. v3 remains the top-ranked open weights model, despite being around 45x more efficient in training than its competition: bad news if you are selling GPUs! R1 represents another huge breakthrough in efficiency both for training and for inference - the DeepSeek R1 API is currently 27x cheaper than OpenAI's o1, for a similar level of quality.
Jeffrey summarized some of the key ideas from the v3 paper like this:
A major innovation is their sophisticated mixed-precision training framework that lets them use 8-bit floating point numbers (FP8) throughout the entire training process. [...]
DeepSeek cracked this problem by developing a clever system that breaks numbers into small tiles for activations and blocks for weights, and strategically uses high-precision calculations at key points in the network. Unlike other labs that train in high precision and then compress later (losing some quality in the process), DeepSeek's native FP8 approach means they get the massive memory savings without compromising performance. When you're training across thousands of GPUs, this dramatic reduction in memory requirements per GPU translates into needing far fewer GPUs overall.
Then for R1:
With R1, DeepSeek essentially cracked one of the holy grails of AI: getting models to reason step-by-step without relying on massive supervised datasets. Their DeepSeek-R1-Zero experiment showed something remarkable: using pure reinforcement learning with carefully crafted reward functions, they managed to get models to develop sophisticated reasoning capabilities completely autonomously. This wasn't just about solving problems— the model organically learned to generate long chains of thought, self-verify its work, and allocate more computation time to harder problems.
The technical breakthrough here was their novel approach to reward modeling. Rather than using complex neural reward models that can lead to "reward hacking" (where the model finds bogus ways to boost their rewards that don't actually lead to better real-world model performance), they developed a clever rule-based system that combines accuracy rewards (verifying final answers) with format rewards (encouraging structured thinking). This simpler approach turned out to be more robust and scalable than the process-based reward models that others have tried.
This article is packed with insights like that - it's worth spending the time absorbing the whole thing.