The technology sector has become completely captivated by artificial intelligence (AI).
While many stocks have witnessed a surge thanks to the AI narrative, perhaps the biggest beneficiaries have been megacap tech companies. Both Nvidia (NVDA +2.33%) and Amazon (AMZN +1.61%) are members of the "Magnificent Seven" -- a catchy moniker used to collectively describe the world's largest tech businesses.
With shares of each stock outperforming the S&P 500 and Nasdaq Composite indexes over the last year, investors may be wondering what the long-term picture might look like.
Let's dig into the current state of artificial intelligence (AI) and assess why both Nvidia and Amazon are emerging as leaders in the space. More importantly, after taking a close look at the longer-term picture, I think investors will see why one of these Magnificent Seven members might have more upside.
NASDAQ: NVDA
Key Data Points
What the next five years could look like for Nvidia
Nvidia is undoubtedly having a moment right now. The company is essentially synonymous with the term "AI," and investors can't seem to get enough of the stock.
It's worth asking how Nvidia actually got to its prominent position in the AI realm, though. When the company was founded roughly three decades ago, Nvidia's primary mission was to enhance the graphics capabilities in video games.
While gaming is still a big business for Nvidia, the technology powering its innovative graphics processing units (GPUs) has evolved significantly. Today, GPUs are implemented across a wide array of generative AI applications -- from training autonomous driving and large language models to developing humanoid robotics, and more.
While the proliferation of AI has been a bellwether for Nvidia, the company is far from the only chipmaker out there.
Right now, two of Nvidia's closest competitors in the semiconductor industry are Advanced Micro Devices and Intel. Although Nvidia is considered to be the market leader in AI-powered chips, demand for GPUs is so high that AMD and Intel have a unique opportunity to pounce on Nvidia's lead as the company faces supply constraints.
On top of rising competition, perhaps the biggest threat to Nvidia's longer-term momentum is the cyclicality of the semiconductor industry. While AI in general should continue to witness strong secular tailwinds, the chip space will likely ebb and flow.
Image source: Getty Images.
What the next five years could look like for Amazon
Amazon is one of the most diversified businesses I can think of. The company dominates e-commerce and cloud computing, and has ventured into other growth areas across media and entertainment, advertising, streaming, grocery delivery, smart home appliances, robotics, and gaming.
This level of diversification provides Amazon with a high degree of flexibility when it comes to competition. What's even more encouraging is that the company's expansion opportunities don't appear to be slowing down.
Over the last year, Amazon has made a number of investments in generative AI that I think have a lot of potential to propel the business ahead of other big tech peers.
Namely, the company invested $4 billion into a start-up called Anthropic. As part of the deal, Anthropic will be using Amazon's homegrown Trainium and Inferentia chips to hone its AI models. Not only should this be a major catalyst for Amazon's cloud business, but it also puts the company in a position to compete with Nvidia. So, in addition to direct competitors like AMD and Intel, Nvidia is also facing tangential competition from the likes of Amazon.
Moreover, Amazon also announced that it is investing $11 billion in data centers in Indiana. This is yet another area where Amazon could be competing with Nvidia, which also has a large data center services business.
The bottom line
Outside of its hardware, Nvidia also has an under-the-radar software business called compute unified device architecture (CUDA). While CUDA could be a good source of alternative growth if the chip business begins to decelerate, I don't think it'll be enough to move the needle.
Considering shares of Nvidia have soared almost 150% over the last year and the company has grown its market cap by nearly $2 trillion just in 2024, it's hard to imagine it sustaining this level of momentum.
Conversely, considering the deal with Anthropic is still new and the data center initiative is currently ongoing, I think Amazon is laying the groundwork to set it apart from the competition. To me, I think Amazon's best days are very much ahead, as its AI ambitions have yet to lead to material acceleration in revenue or profits.
While both Nvidia and Amazon have promising futures, I think Amazon will be the better Magnificent Seven investment in the long run due to the company's diversification and the potential of its various investments.
