Investors often worry about competition in the chip market.
Key Points
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Nvidia is the leading seller of AI chips, generating triple-digit revenue growth.
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The company faces rivals, including Advanced Micro Devices, and even some of its own customers, such as Amazon.
Nvidia(NASDAQ:NVDA) has constructed an artificial intelligence (AI) empire over the past few years. The company sells the world’s most powerful AI chips, known as graphics processing units (GPUs), and an entire portfolio of related tools that are generating triple-digit growth and record levels of revenue.
Investors have piled into Nvidia stock to gain access to this incredible growth story, and so far, they’ve scored a major win. The stock has soared about 800% over the past five years. But, in recent times, investors have worried about one particular challenge: competition. Though Nvidia remains in the lead, a number of companies also sell AI chips — and these products are becoming more powerful with each update.
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These players include chip companies like Advanced Micro Devices as well as broader tech giants like Amazon (NASDAQ:AMZN). All of this has prompted some investors to pause before getting in on Nvidia stock at this stage of the AI story. Nvidia stock has climbed about 14% this year, which isn’t a big leap for this stock.
Just recently, however, some bright news emerged during Amazon’s earning call. In fact, these 15 words from Amazon chief Andy Jassy may eliminate Nvidia’s biggest risk.
Nvidia’s chip business
Before we consider Jassy’s comments, though, let’s take a closer look at Nvidia’s chip business and the competitive landscape. As mentioned, Nvidia is the AI chip leader, and this is thanks to the company’s early arrival in this market and its commitment to updating its chips on an annual basis. This consistent innovation makes it very difficult for others to jump ahead. And it’s helped Nvidia’s revenue explode higher; in the recent quarter, revenue surged 100% to more than $96 billion. And this is at a high level of profitability on sales, with gross margin topping 70% quarter after quarter.
When it comes to competition, Nvidia faces it from fellow chip designers such as AMD and Intel, as well as certain tech companies that have designed their own chips. Amazon is particularly notable since its Amazon Web Services (AWS) unit is the world’s biggest cloud service provider. This suggests that an enormous number of companies likely turn to AWS for their AI needs — and here, they find Nvidia’s top chips, but they are also offered access to Amazon’s own in-house-developed chips. Amazon’s chips span the areas of central processing units — these are the main chips in computers — to the chips that power AI tasks.
Amazon has put the focus on performance, but at a price that appeals to cost-conscious customers, and demand has soared. In fact, the company’s custom chips annual revenue run rate has reached more than $25 billion.
Andy Jassy’s recent words
All of this may sound like bad news for Nvidia, but Jassy pronounced 15 words during the recent earnings call that actually represent just the opposite.
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“We have customers who will run on Nvidia for as long as we can foresee,” Jassy said.
This means that Amazon isn’t in the chip business to replace Nvidia but simply to offer customers a wide range of options and different price points. Jassy also said Amazon would continue to make AWS “the best place to run Nvidia chips.” So investors probably shouldn’t worry about Amazon or even other chip players taking major market share from Nvidia in the years to come.
In fact, demand for compute is so high that, for AI to advance, it’s important to have a number of companies providing it. Nvidia, alone, probably couldn’t serve the entire market worldwide. This is positive for chip designers in general because it suggests that many of them may score a win, and they can do so without dethroning Nvidia. So it’s a win-win situation for those in the chip space, including market behemoth Nvidia.
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Intel, and Nvidia. The Motley Fool has a disclosure policy.