Nvidia (NVDA +2.61%) has seen its fortunes rise on the back of surging demand for artificial intelligence compute. Its graphics processing units (GPUs) stand out as best in class when it comes to AI training and inference, which has resulted in soaring prices for its chips as big tech buys up supply as fast as Nvidia can make them.
Thanks to its technology lead, Nvidia commands a market share of around 80% of all AI chips for rent on cloud computing platforms, according to estimates. And that might only be limited by its ability to supply enough chips to its biggest customers.
But one of those major customers just signed a deal that could signal that dominant market share is under threat. And if Nvidia's other major customers follow suit, it could be reason to pump the brakes on Nvidia's stock.
Image source: Nvidia.
Nvidia is heavily reliant on just a handful of big tech names
While Nvidia has exhibited extremely impressive revenue growth over the last few years, that sales growth stems from just a handful of customers. In fact, its customer concentration is increasing. Last quarter, just two customers accounted for 39% of its total sales. Its top six customers accounted for 85%. That's compared to 25% from its top two customers and less than 66% from its top six customers in the year-ago period.
Those customers are very likely Microsoft, Amazon, Alphabet, Meta Platforms, OpenAI, and Oracle, not necessarily in that order.
It's worth pointing out that not all of those customers are the end users for Nvidia's chips. Microsoft, Amazon, Alphabet, and Oracle are all building out public cloud platforms, renting out their compute capacity to third-party businesses. As a result, the customer base is a bit more diverse. That said, Oracle's cloud buildout is increasingly tied to demand of OpenAI services, while Microsoft has long been intertwined with the generative AI leader.
NASDAQ: NVDA
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But OpenAI is signaling it might not rely so much on Nvidia going forward. Despite signing a big deal to buy Nvidia GPUs in exchange for up to $100 billion in capital investment from the GPU leader, OpenAI just signed a huge deal with rival GPU maker Advanced Micro Devices (AMD +3.89%). The contract gives OpenAI warrants to buy shares of AMD at $0.01 per share upon meeting certain purchase requirements of AMD chips (among other requirements).
OpenAI plans to deploy 6 gigawatts of AMD GPUs over a multiyear period. It receives a tranche of warrants to buy AMD stock for each gigawatt it buys. In effect, AMD is giving OpenAI a discount on its chips while further entrenching itself in the AI ecosystem. For reference, Nvidia's deal with AI will fully vest if OpenAI buys 10 gigawatts of GPUs. So Nvidia's still in a position to supply the majority of OpenAI's compute, but its dominant share is slipping.
This could be just the start of a new trend
OpenAI's deal with AMD could be one of many for the rival GPU maker. The deal hinges on AMD's forthcoming MI450 line of GPUs, which should come out around the same time as Nvidia's Rubin architecture. AMD is confident that the MI450 will outperform Nvidia in both training and inference, which is a bold claim. At the very least, analysts expect its performance to be competitive, which should be good enough to garner significant market share gains from Nvidia.
Hyperscalers need AMD as a counterbalance to Nvidia, which currently holds tremendous pricing power. If the MI450 is as powerful as management claims, it could mean a huge shift in spending not just from OpenAI, but from Nvidia's other major customers as well. AMD is building rack-level systems that should make it easy for customers to make the switch.
NASDAQ: AMD
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On top of that, Nvidia's customers are also making progress in developing custom silicon solutions. Microsoft is planning to make a significant investment in its next generation Maia300 chip, redesigning it this summer to take advantage of more advanced technology. Meta, likewise, is working to expand the use cases for its custom MTIA chips to generative AI use cases. And OpenAI is planning to develop a custom silicon solution. It's partnering with Broadcom, reportedly planning to spend $10 billion on a custom AI accelerator design.
While investors shouldn't expect any of Nvidia's biggest customers to ditch it entirely, the push to move away from relying on Nvidia is gaining momentum. OpenAI's deal with AMD is likely just the start. With the stock trading at a forward P/E above 40, shares look expensive given the current potential to see a slowdown in revenue growth as customers move away from the GPU giant.
