Nvidia (NASDAQ: NVDA), with a market cap of more than $3 trillion, is now one of the three largest companies in the world. This is not a fluke. The chip maker's control of the data center GPU market is estimated at around 90%. Its GPUs are widely considered the best in the world, as evidenced both by its high market share and its market-leading gross margins. The AI revolution literally runs on these GPUs, and Nvidia's dominance in the data center GPU space gives it a front-row seat to AI's long-term growth.
Over time, however, competition will take its toll. It may take years, but eventually, Nvidia's market share will shrink. And long before that, we should see pricing pressure reduce its gross margins. All of this doesn't make it a poor long-term investment. In fact, Nvidia shares might be very cheap right now despite the threat of long-term competitive pressures. But like any market, competition will eventually appear, giving huge upside potential to AI stock Amazon.
Cloud computing stocks will benefit from chip sector competition
There is no doubt that Nvidia's GPUs are king right now. Rival chipmakers like Intel and AMD not only have far lower market shares in data center GPUs, but also dramatically lower gross margins -- an indicator that their chips don't command nearly the same premiums that Nvidia's do. A decade ago, Intel actually had higher gross margins than Nvidia. But thanks to the tech sector's unquenchable demand for AI accelerator chips, Nvidia is now posting some of the highest gross margins ever seen in the semiconductor industry.
NVDA Gross Profit Margin (Quarterly) data by YCharts.
Competitors have noticed. Beyond Nvidia's traditional foes like Intel and AMD, an array of global competitors and well-funded start-ups are seeking to replicate its success. Over the long term, the performance advantages Nvidia's chips offer should diminish on a relative basis, cutting into its pricing power and leading to lower gross margins.
Which companies will benefit from this chip industry war? Giant data center operators like Amazon (AMZN -2.55%). By the end of this decade, it won't be surprising if the tech giant has a higher market cap than Nvidia due to its Amazon Web Services (AWS) division alone.
Image Source: Getty Images.
1 Reason Amazon could be worth more than Nvidia
People usually think of Amazon first as an e-commerce business. That's understandable: The online sales division is responsible for most of the company's revenues. But when it comes to its profits, Amazon Web Services reigns supreme. In recent quarters, AWS has provided more than half of Amazon's total operating profits. The division has consistently been posting its highest profit margins in years, fueled by overwhelming demand for its cloud computing network -- demand that is a direct result of the rising use of AI and the tech world's efforts to rapidly develop better models.
Right now, AWS is to cloud computing as Nvidia is to data center GPUs. It has a dominant 30% global market share, with industry-leading profit margins to match. It has nearly as much market share in cloud infrastructure as its two nearest competitors combined. And while it is a major buyer of Nvidia's products, it is, at the end of the day, fairly agnostic to the chip wars. It will buy whatever chips its own customers demand to power their software. If more competition emerges in the AI accelerator space, AWS will have the ability to buy cheaper chips from more manufacturers -- a big deal considering that Nvidia's pricey chips also come with wait times of up to 12 months right now, which limits the ability of AWS to scale up in parallel with customer demand.
Some analysts believe that AWS alone could eventually be worth $3 trillion -- which is roughly Nvidia's current market cap. Add in the value of its other businesses, and the case for Amazon outpacing the chipmaker becomes obvious.
Competition in the AI chip space will emerge in full force this decade, and AWS should benefit. So don't be surprised to see Amazon's valuation exceed Nvidia's based on its cloud segment's long-term success.
