Semiconductor company Nvidia (NVDA +4.39%) dominates the market for artificial intelligence (AI) chips. In fact, analysts estimate its graphics processing units account for up to 95% of AI chip sales. But history is full of cautionary tales about the downfall of dominant brands that failed to maintain their technological leadership.
IBM was once a highly esteemed computing company due to its mainframes and storage solutions, but it failed to innovate around cloud computing and PCs. Cisco was briefly the most valuable company in the world, back when the internet buildout drove demand for its networking products, but it no longer ranks among the top 50 because it failed to innovate.
Those are just two examples from a long list that includes AOL, BlackBerry, Blockbuster, Kodak, and MySpace. To be clear, Nvidia is in no immediate danger of joining that list, but history says shareholders would be foolish to dismiss the idea completely. Indeed, recent warnings from Apple (AAPL 0.27%) and Amazon (AMZN 1.15%) make it clear that Nvidia is not immune to competition.
Here are the important details.
NASDAQ: NVDA
Key Data Points
Apple's warning to Nvidia shareholders
Earlier this year, Apple announced a set of artificial intelligence (AI) capabilities for iOS and macOS devices called Apple Intelligence. Features include drafting and revising text, generating images, and summarizing notifications, as well as a more capable version of the personal assistant Siri. Apple Intelligence will launch in late October.
In July, Apple published a technical paper stating, "Apple Intelligence consists of multiple highly capable generative models that are fast, efficient, specialized for our users' everyday tasks, and can adapt on the fly for their current activity." The paper also detailed how two of those models -- one that runs on devices for simple tasks, and another that runs in private data centers for more sophisticated tasks -- were trained.
Importantly, Apple did not use Nvidia graphics processing units (GPUs) to develop its large language models. It used custom silicon called tensor processing units (TPUs) designed by Alphabet's Google and Broadcom. Notably, Broadcom is also helping other companies design custom AI chips, including Meta Platforms, OpenAI, and ByteDance, according to JPMorgan Chase.
Here's the bottom line: Apple's decision to use TPUs rather than GPUs to train its AI models is a warning that viable alternatives to Nvidia exist. The relative importance of that decision is yet to be determined. If Apple Intelligence is glitchy, it may turn into a cautionary tale about what happens when companies stray from the industry standard. But if Apple Intelligence is well received by consumers, Apple's decision to use TPUs may inspire other companies to do the same.
Amazon's warning to Nvidia shareholders
Alphabet's Google is not the only public cloud to develop custom AI silicon. Amazon Web Services (AWS) has done the same thing. Its custom chips -- Trainium for AI training and Inferentia for AI inference -- are not designed to outshine Nvidia GPUs on performance alone, but rather to give customers a more cost effective alternative.
Alphabet and Amazon have deep partnerships with Nvidia. Both companies offer compute instances powered by Nvidia GPUs and that will not change anytime soon. Nvidia GPUs are the gold standard in data center accelerators, so it would be nonsensical to not offer that option. However, both companies have seen fit to develop their own chips on the side.
Amazon CEO Andy Jassy recently said:
"We've heard loud and clear from customers that they relish better price performance. It's why we've invested in our own custom silicon in Trainium for training and Inferentia for inference. And the second versions of those chips, with Trainium coming later this year, are very compelling on price performance. We are seeing significant demand for these chips."
Here's the bottom line: Some companies will gladly pay a premium for Nvidia GPUs, but demand for AWS's custom silicon shows that other companies will gladly use slower chips to save money. In other words, AWS (like Apple) is warning investors that Nvidia will almost certainly lose market share in the future, which could pressure the company's margins as it fights to compete with cheaper alternatives.
