Please ensure Javascript is enabled for purposes of website accessibility

Amazon and Alphabet Take on NVIDIA

By Billy Duberstein - Updated Feb 23, 2018 at 3:59PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

By bringing AI chipmaking in-house, could Amazon and Alphabet be a threat to high-flying NVIDIA?

Amazon (AMZN 3.15%) recently joined other tech giants such as Apple (NASDAQ: AAPL) and Alphabet (GOOG -0.27%) (GOOGL -0.21%) in designing its own custom chips. According to a report by The Information, Amazon has begun designing custom artificial intelligence (AI) chips for its Alexa-enabled home speakers. 

The report also said that Amazon may be looking to extend the chipmaking venture into products for its Amazon Web Services (AWS) data centers. If that happens, it could potentially spell trouble for high-flying AI chipmakers NVIDIA (NVDA -4.20%) and Intel (NASDAQ: INTC). Here's how Amazon's ambitions could affect the AI race.

A blue cartoon brain atop an invisible man in a suit signifying artificial intelligence.

Could Amazon's new artificial intelligence chip threaten Nvidia's data center growth? Image source: Getty Images. 

First to Alexa

Alexa has been the main focus for Amazon this year, as Alexa adoption has surprised even optimistic company executives with its growth. With Apple's recent entry into home speakers with the HomePod, however, Amazon likely feels the need to up Alexa's game in both sound and speed. A custom chip could boost Alexa's inference capabilities -- the ability to process external inputs like speech and make sense of them at the device level. Doing more processing at the device level means less information needs to be sent back to the cloud, which means faster response times.

Amazon has developed these chipmaking capabilities over the past few years through both internal hires as well as acquisitions, buying Annapurna Labs, an Israeli-based chipmaker, in 2015 for $350 million, and Blink, a maker of low-power security cameras, for $90 million late last year. Many believe Amazon was really after Blink's power-management chipmaking capabilities, rather than just its camera products, as Amazon already has its own Cloud Cam product that it rolled out last year.

Then to the data center?

The report was mostly centered on Alexa, but an AWS data center chip was also mentioned as a possibility. While Amazon has a big lead in cloud computing, other rivals, especially Alphabet, are investing huge sums to catch up in this all-important race.

Alphabet has been investing in custom hardware for years, and recently unveiled its second-generation tensor processing unit (TPU), designed specifically for AI neural networks. According to The New York Times, the TPU development not only puts Alphabet in a race for technological superiority with makers of graphics processing units (GPUs) like NVIDIA, but may also afford Alphabet negotiating leverage over GPU producers as well. (Google still buys NVIDIA chips, according to The Times. GPUs, originally designed for graphics and gaming, are the leading machine-learning chips today.)  In addition, Alphabet has started renting out its TPU computing power to developers using Google's Cloud Platform.

The combination of technological innovation and the ability to lower costs is likely what caused Amazon to start developing its own chips, as it looks to maintain its cloud computing lead against these well-heeled competitors.

Trouble for NVIDIA?

While Amazon and Alphabet's development of custom AI chips is something to monitor, NVIDIA investors shouldn't panic just yet. The company recently reported a blowout quarter and making new chips -- especially when it's not your main focus -- can be costly and time-consuming. In addition, NVIDIA still gets the majority of its revenue from the gaming division, which accounted for 60% of sales last quarter; the data center market makes up only 21% of sales. Moreover, specialty custom chips are still a small part of data center chip content, and NVIDIA's GPUs are still taking share from traditional central processing units.

When questioned about Amazon and Alphabet, NVIDIA management said that while there will always be custom AI chips for specific tasks, NVIDIA's chips should continue to be the go-to choice for a wide array of industries and functions requiring GPUs.

Still, the data center market has been NVIDIA's highest-growth segment over the past two years, with quarterly revenue up an astounding 323% compared to two years ago. Therefore, any slowdown in this segment could potentially halt NVIDIA stock's rapid ascent. That means NVIDIA investors should definitely monitor the adoption of Google TPUs and Amazon's new chipmaking venture in the year ahead. 

The race for AI supremacy is on, and there are many big tech companies with lots of talent gunning to make the best artificial brain on the market. Stay tuned.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$109.56 (3.15%) $3.35
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$145.23 (-4.20%) $-6.36
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,174.75 (-0.21%) $-4.51
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,181.62 (-0.27%) $-5.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.