Everyone's talking about artificial intelligence (AI) these days, and that means everyone is talking about Nvidia (NVDA 6.18%) too. The chipmaker originally splashed onto the scene with its graphic processing units (GPUs) for the gaming and graphics markets. But today, these chips also power the training of AI models, and that's helped Nvidia's earnings and share price to explode.
In fact, Nvidia now generates most of its revenue from AI clients and holds about 80% of the AI chip market. That's great, but knowing how quickly things move in technology, it's fair to ask ourselves whether Nvidia can keep up this leadership or if eventually it will lose a significant chunk of market share. After all, it's not the only game in town. Advanced Micro Devices (AMD), for example, has grown its share in the GPU market in recent times and even launched a powerful new chip late last year.
Considering all of this, how solid is Nvidia's moat or competitive advantage? Let's find out.
Image source: Getty Images.
Nvidia's gaming history
First a little background on Nvidia. The company's GPUs took center stage in the gaming community years ago due to their ability to divide tasks among processors, therefore allowing many tasks to take place at the same time. This worked extremely well for the visuals in video games and other graphics applications, so textures, light, and shapes all could hit the screen simultaneously.
The rest of the world eventually discovered GPUs thanks to their ability to speed up workloads, and that's how they became the engines powering AI. Nvidia's CUDA parallel computing platform helps developers capture the power of GPUs and apply it across these applications, well beyond the GPU's original uses.
You'll find Nvidia GPUs everywhere from data centers to laptops and even in the world's biggest supercomputers. These chips are unbeatable for the "deep learning" of AI models, offering them the power they need for training and inference. And the company has partnered with other AI leaders such as Amazon and Microsoft, so if you use those cloud services, you may be relying on Nvidia GPUs for your deep learning projects.
Nvidia vs AMD
Of course, Nvidia faces competition in this area, particularly from AMD, as mentioned above. This big rival recently released a new chip series -- MI300X -- and claimed it was even faster than Nvidia's H100 GPU. If a rival significantly beats Nvidia's speed, this eventually could hurt the AI giant's market share and earnings. But in this particular case, Nvidia followed up on the AMD news, showing its chip, when using the right software, actually is twice as fast as the MI300X.
And Nvidia has quite a lead from an earnings perspective too, with its data-center business, which includes chips to power AI, bringing in more than $14 billion in revenue in the most recent quarter. That's compared to AMD's $1.6 billion in data-center revenue.
So, from a market share, earnings, and performance perspective, Nvidia remains ahead in the AI chip space.
Now, let's consider the solidity of Nvidia's moat, which is a combination of its brand strength and technological strength. Though rivals could gain some market share in the coming years, I don't expect them to unseat Nvidia -- for three reasons.
First-to-market advantage
First, when it comes to GPUs, Nvidia has the first-to-market advantage, progressively expanding its offerings and successfully serving AI clients. If customers are satisfied with performance, and they are advancing their AI projects, it's unlikely they'll switch to another chip along the way.
Second, a look at a pattern in the central processing unit (CPU) market reinforces the idea that chip customers tend to stick with the market leader: Though AMD has increased its market share in CPUs over the years, it hasn't unseated Intel.
Finally, Nvidia is far from resting on its laurels and instead, heavily invests in research and development to remain a leader in the AI space. The company increased R&D spending by 15% in the first nine months of last year to more than $6.2 billion. Considering Nvidia is highly profitable and revenue continues to soar, the company has what it takes financially to continue this investing momentum, which should lead to innovations that will keep it in the lead.
NVDA Net Income (Quarterly) data by YCharts.
So, yes, Nvidia faces competition, and these rivals surely will gain some market share, but this doesn't represent a huge threat for the AI giant. That's because the elements I've talked about are like deep waters keeping Nvidia's moat secure -- and difficult for rivals to cross -- well into the future. And that makes Nvidia a top AI stock to buy and hold onto for the long term even after last year's triple-digit gain.
