In the span of only a few years, Nvidia (NVDA 0.74%) has become one of the largest stocks in the world. Indeed, as of this writing, the company boasts a market cap of more than $3.5 trillion, only slightly trailing Microsoft as the world's largest company by market cap.
The engine that propelled Nvidia's stock to these incredible heights has been its industry-leading graphics processing units (GPUs), which are favored by artificial intelligence (AI) developers for their power and speed.
However, as the AI revolution rolls on, other companies may supplant Nvidia. Aside from the inevitable battle for GPU market share, other companies may be better positioned to benefit from the next phases of the AI revolution. And there's one stock that my decades of investing experience tell me is the one to watch.
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Nvidia's rise has been fueled by revenue and margin growth
There are two things that stand out about Nvidia's rise over the last three years: revenue and margin growth.
First, the company's revenue has simply gone through the roof as the AI revolution took flight. In 2022, Nvidia generated about $27 billion in revenue. As of its most recent quarter (for the three months ending on Jan. 26), the company reported $130 billion in revenue. That's shockingly fast growth, and it's the reason most often cited for why Nvidia's share price has advanced by more than 800%.
NASDAQ: NVDA
Key Data Points
However, in addition to its incredible revenue growth, the company's margins widened. In 2022, the company's gross margin stood around 60%. Today, it's around 70%. That's excellent and far ahead of the company's traditional competitors like Advance Micro Devices and Intel.
NVDA Gross Profit Margin data by YCharts
However, like all good things, this gross margin dominance will to come to an end at some point, as competition heats up. Not only will AMD and Intel improve their designs and take market share, but new competitors will enter the market. Deep-pocketed players like Alphabet, Amazon, Microsoft, Meta Platforms, and Apple are all at work on their own AI chip designs that might eventually eat away at Nvidia's margins.
So, as this market for AI chips becomes more saturated, who will benefit? My investing instincts point to one of the big buyers of AI chips.
Amazon could reap the benefits as the AI chip market becomes more competitive
Ultimately, basic economics principles say that the buyers of AI chips will benefit as the AI chip market becomes more competitive. That is, as the price of AI chips fall, the companies that buy the most chips will save money, resulting in higher profits.
That's great news for Amazon, because, as the world's leading cloud services provider, it will need to spend heavily on AI chips for years to come.
Amazon, through its Amazon Web Services division, controls around 30% of the cloud services market. That might not seem all that impressive, but consider this: Amazon's market share is roughly equal to the next two largest providers combined -- Microsoft and Alphabet.
Moreover, the cloud infrastructure market is enormous (at around $700 billion) and red-hot, growing at around 15% year over year. The rise of power AI systems is only adding fuel to the fire, as companies look to cloud-based AI to deliver higher sales and lower costs.
In short, the next phase of the AI revolution could see the focus shift away from AI infrastructure (GPUs) and toward practical AI, as companies pour resources into cloud-based, AI-enhanced systems that help their organizations' operations.
Nvidia remains the king of AI -- for now. However, as the AI revolution evolves, companies in the cloud services market could be the real winners. Furthermore, Amazon stock, with its leading position in that key market, could ultimately outperform Nvidia stock in the long term.
