When it comes to semiconductor stocks, I'd wager that investors rarely look any further than Nvidia. And why would they?
With shares up 141% in just the past year, Nvidia has been a darling among megacap tech stocks and artificial intelligence (AI) opportunities more broadly.
However, smart investors understand that nothing goes up forever. Eventually, reality sets in and investor euphoria can wane. Moreover, as AI continues to experience more demand, it's natural for other chip companies to emerge as formidable competitors to Nvidia.
Let's break down where Nvidia stands today, and why Tesla (TSLA 5.42%) could end up as Nvidia's biggest challenger in the long run.
NASDAQ: TSLA
Key Data Points
Nvidia is the 800-pound gorilla, but...
Nvidia specializes in designing semiconductor chips called graphics processing units (GPU).
At the moment, GPUs are in high demand as many technology companies are furiously at work training large language models (LLMs) or building machine learning applications.
Nvidia is estimated to have an 80% market share of the AI chip market thanks to the company's impressive line of A100, H100, and Blackwell chips.
On the surface, this dynamic looks great for business. However, the other side of the equation is that Nvidia is experiencing bottlenecks in its supply chain given such abnormal demand levels for its chips.
Image source: Getty Images.
...competition is not far behind, and...
Outside of Nvidia, some of the more obvious competitors in the chip realm include AMD and Intel.
AMD's MI300X accelerator and the Gaudi 3 from Intel are each company's response to Nvidia's GPU roster at the moment. While Nvidia is still in the lead, I don't think investors should sleep on the idea of competition catching up.
The current dynamics of Nvidia's supply constraints will allow companies like AMD and Intel to make a move and start gaining some ground on their larger competitor.
Beyond mainstream chip designers, "Magnificent Seven" companies Amazon and Meta are also hard at work developing their own chips.
While Meta currently uses hundreds of thousands of Nvidia H100 GPUs, the company is actively working to migrate away from its reliance on these chips by developing its own in-house tech.
Additionally, Amazon has also been touting its own line of chips -- dubbed Trainium and Inferentia. The company's recent $11 billion investment into data centers is a clear signal that Amazon is serious about its own chip development, and could very well become a major force competing against Nvidia in the future.
Nevertheless, despite the aggressive tactics coming from both direct and tangential competitors, I see Tesla as a sleeper pick for Nvidia's biggest competitor in the long run.
...Elon Musk is entering the ring
One of the character traits that makes Elon Musk so unique is that the entrepreneur has an unwavering knack for entering new markets. While Musk helped pioneer the electric vehicle (EV) movement, some moves by the company over the past couple of years suggest that his vision spans far beyond automobiles.
Musk has made it clear that the next phase of Tesla hinges largely on successful execution of the company's self-driving software platform -- dubbed FSD. At its core, FSD is the key to building Tesla's robotaxi fleet, as well as igniting newfound demand for its EVs over the competition.
Perhaps unsurprisingly, Tesla is currently a large customer of Nvidia and uses its GPUs to help train its self-driving car models, known as Dojo.
However, during Tesla's second-quarter earnings call, Musk proclaimed that he plans to "double down on Dojo" and that the company has "a path to being competitive with Nvidia with Dojo."
On the surface this might seem a little far-fetched. However, longtime Tesla investor Cathie Wood of Ark Invest considers robotaxi alone to be a $10 trillion opportunity in the long run.
Moreover, Musk sees Tesla as far more than an EV manufacturer at this point. His view is that Tesla is a robotics and AI business.
Bearing all of that in mind, I think it actually makes sense that the company would begin to allocate more resources toward its own in-house tech and away from external vendors.
Although I think it will take several years for Dojo to be on par with Nvidia or other leading providers, I believe in Musk's vision and his ability to create a full spectrum AI enterprise with a custom-built tech stack.
Given the potential of Tesla's Dojo supercomputing and processing power to disrupt the auto and robotics industries, I would not be surprised to see other companies begin to move away from Nvidia over time.
This presents a unique opportunity for Tesla to enter yet another market, and gain ground on Nvidia by becoming a major force in the chip realm one way or another.
