Long-term investing is usually the key to sustainable stock market returns. But a company's short-term risks and opportunities can reveal early clues on how the whole story will play out.
Let's dig deeper to see how competition in the artificial intelligence (AI) industry and a push for sovereign AI could affect Nvidia's (NVDA +1.67%) performance over the next year and beyond.
Nvidia is still the king of generative AI
Make no mistake, Nvidia is still the king of the generative AI training and inference chip industry with an incredible market share of 80% to 90%. The company maintains its economic moat with a combination of constant innovation, support software, and a developer community that is accustomed to using its products. That said, when you are already at the top, there is only one way to go: down.
NASDAQ: NVDA
Key Data Points
That isn't to say Nvidia's business is crashing, because it isn't. First-quarter revenue jumped 69% year over year to $44.1 billion, which is a healthy expansion driven by the continued rollout of the company's new Blackwell-based AI chips. However, this is a stark deceleration compared to the 262% growth rate Nvidia experienced this time last year.
Some observers will chalk up Nvidia's relatively lackluster first-quarter performance to challenges in China, where the Trump administration's policy effectively ended its imports of H20 chips into the country (causing a $4.5 billion impairment charge related to excess inventory). However, this may be the start of a longer-term trend, a little closer to home.
Nvidia's clients are becoming its rivals
Historically, Nvidia has managed to sell its hardware at gross margins pushing 80%, which is a level typically seen with software companies that don't sell physical products. These immense mark-ups create an incentive for Nvidia's biggest clients (many of which are technology leaders in their own right) to replace its products wherever possible.
OpenAI has been particularly aggressive in its efforts to diversify its supply chain. In February, OpenAI began finalizing designs with Taiwan Semiconductor Manufacturing to fabricate its first custom AI chip to help run and train its AI workloads without relying on Nvidia hardware.
Custom chips are a particular threat to Nvidia's business model because they can be more cost-effective for specialized use cases compared to Nvidia's one-size-fits-all solutions. And OpenAI expects to have its new chips ready for mass production in 2026.
Other major clients like Alphabet and Amazon already make in-house chips, which are offered for client workloads alongside Nvidia hardware through their respective cloud computing platforms, Google Cloud and AWS.
Image source: Getty Images.
What will the next year have in store?
While Nvidia has a great deal of near-term challenges, it also has opportunities. One of the biggest of these may be a concept called sovereign AI, which involves helping countries control their own AI data, hardware, and infrastructure without over-relying on foreign tech companies (mainly in the U.S.). For many countries, this is important because their unique linguistic, cultural, and political situations may not be well served by large language models developed elsewhere.
So far, Nvidia has received a warm reception while pioneering this idea in Europe, where it is helping France, Italy, and the U.K. deploy thousands of Blackwell systems with the help of local partners. Nvidia is also making progress in the Middle East, where it is working with a Saudi partner, HUMAIN, to build what it calls AI factories using its hardware.
The sheer scale of these projects (the deal with HUMAIN may involve 5,000 Blackwell chips) could help Nvidia counteract the potential declines in private sector demand for its products. That said, this story is just getting started. And it is unclear if the soverign AI concept will fully catch on. Investors should probably wait for more information before considering a position in the stock.
