What happens if Nvidia employees hit their “number?”

In case you missed it, Nvidia had their quarterly earnings report yesterday, and the semiconductor juggernaut recorded $30 billion in revenue and $16.9 billion in net income as big tech companies continue spending money hand-over-fist to build their AI offerings.

One reason that Nvidia has done so well is that, thanks to its market dominance, it can flex its pricing power on customers, as seen in its 75.1% gross margins last quarter.

But the big question now is, how long will Nvidia’s dominance continue? Competition from its own customers is a risk, as big tech companies are now investing in their own chips to diversify away from Nvidia’s products. However, another risk, which I haven’t seen discussed as much, is Nvidia’s ability to keep its employees motivated now that they’re rich.

From Bloomberg:

Nvidia stock has gained 3,776% since the start of 2019 as the company benefits from selling the main chip necessary for artificial intelligence work, minting many new multimillionaires in the process. But the work hours are just as grueling and high-stress, current and former employees said, leaving little time for the jet-setting, homebuying and leisure many can now afford. A culture problem is brewing, said the 10 people, who asked not to be identified for fear of retribution…

One former employee, who worked in technical support for enterprise clients, said he was expected to work 7 days a week, often until 1 a.m. or 2 a.m. He said many of his former colleagues, especially those on engineering teams, worked longer hours. He described the environment as a pressure cooker, noting several company meetings he characterized as yelling fights — but said the pay package made it hard to leave. He left in May and requested anonymity to speak frankly about the company.

Another, who worked in marketing until 2022 and requested anonymity to protect her career, said she often attended 7 to 10 meetings per day, each with more than 30 people involved, often punctuated by bouts of fighting and shouting. But she said she put up with it for two years, because of the “golden handcuffs” — the opportunity for even more wealth.

I compared Nvidia’s historic headcount, stock-based compensation, and stock price appreciation to estimate how valuable those “golden handcuffs” might be.

RSUs, or restricted stock units, are a common form of stock-based compensation, and the grant price used to determine the number of shares awarded is typically based on the stock price around the time an employee joins (for example, in a forum on anonymous professional networking site Teamblind, a current Nvidia employee noted that his RSU grant price was based on the “first week in the calendar month after the month of joining”).

If, for example, your contract stated that you would earn $100,000 in RSU compensation, and your company’s stock price was $100 for your entire first year, you would be paid 1,000 shares. If your RSUs vest over multiple years, you will be paid the same number of shares each year, regardless of the stock price, meaning that if the stock price increases (or decreases), the value of your RSUs will increase (or decrease).

Per employee salary information site levels.fyi, Nvidia’s RSUs vest over four years, meaning that RSUs for employees who joined 2-4 years ago are now worth a lot. The table below shows the annual value of the average employee’s RSUs, based on the Nvidia’s end-of-year price year in their starting year and Nvidia’s current stock price of $120*:

The average Nvidia employee earned $73,623 in stock-based compensation in 2020 when Nvidia’s stock was $13 per share. An employee who started at the end of 2020, earning $73,623 in 2020 RSUs, would make $679,598.66 in RSUs alone in 2024, assuming the stock remains around its current price of $120. If the average employee who started in 2020 held all of their RSUs over the last four years, they would have approximately $2.7 million right now. Even if they sold at the end of year each year, they would have netted $1.2 million. The bottom row of the table above shows much much the average employee is making in 2024 RSUs, based on their start date.

Over the last four years, Nvidia’s employee turnover rate has been well-below the market average, with its current turnover rate only 2.7%, down from 5.3% last year. But given that so many of Nvidia’s employees have now made millions from its stock price appreciation, you have to wonder how many will opt for retirement over the grueling 24/7 grindset? While Wall Street is focused on customer demand, I think the biggest risk facing Nvidia is an employee exodus.