Long-standing lines that have distinguished chipmakers from one another are being crossed. Namely, Qualcomm (QCOM 2.63%) -- largely focused on computing processors for mobile devices -- is entering the artificial intelligence arena that Nvidia (NVDA 2.13%) dominates. The company said as much on Monday, unveiling two new processors purpose-built for AI data centers.
The question is, will Qualcomm's unlikely foray into the business prove disruptive to Nvidia, and, for that matter, relative newcomer Advanced Micro Devices (AMD 0.87%)?
Maybe. But, first things first.
Qualcomm enters the artificial intelligence chip fray
OK, it's not exactly a jaw-dropping shocker. The $2.4 billion acquisition of AI inferencing specialist Alphawave Semi, announced in June, was explicitly touted as a deal that "provides key assets for Qualcomm's expansion into data centers." And, considering Global Market Insights' forecast of 15% annual growth in the worldwide data center chip market from around $16 billion now to more than $60 billion by 2034, there's just too much money on the table to pass up.
Nevertheless, seeing confirmation of a specific product makes it very real for existing and would-be shareholders. That's why Qualcomm stock jumped more than 11% on Monday in response to the news.
NASDAQ: QCOM
Key Data Points
And it's encouraging news to be sure. The AI200 chip-based accelerator cards (and racks) expected to debut next year will offer "superior memory capacity for fast generative AI inference at high performance per dollar per watt." The AI250 slated for launch the following year will do the same, but even better, putting Qualcomm squarely in a space other than the high-performance mobile processor market, where it's been focused for years now.
Simply getting into a business, of course, doesn't necessarily mean the industry is interested in abandoning more proven providers and purchasing your technology instead. Do Nvidia and its shareholders (and to a lesser degree, AMD and its investors) have something to worry about here?
A significant shift in the industry's infrastructure preferences
There's no outright confirmed figure of Nvidia's share of the artificial intelligence accelerator market. Given its early entry in the race with purpose-built processors, however, no one seems to dispute estimates that the number could be as high as 90%.
This sort of commanding lead can't last forever, though. A competitor largely just needs to step up its design and marketing efforts to make a dent in Nvidia's dominance.
That's what AMD finally did in earnest late last year, unveiling its MI325X chip meant to compete with Nvidia's Blackwell processors, which -- at the time anyway -- were its AI data center workhorse. And it's done reasonably well with this lineup. AMD's second-quarter data center revenue of $3.2 billion was up 14% year over year despite headwinds in China, proving Nvidia's grip on the market isn't exactly ironclad.
Image source: Getty Images.
That's not the only proof that Nvidia can be beaten on the artificial intelligence data center front either. Data center owners/operators like Amazon, Alphabet's Google, and Microsoft are also increasingly bypassing Nvidia and instead opting to work directly with chip developers like Broadcom (AVGO 2.66%) and Marvell Technology (MRVL 2.87%) to manufacture their own custom silicon. Google's Tensor processing units, serving as the digital brain for several of its training and inference platforms, were actually co-developed with Broadcom, for instance. Notably, artificial intelligence newcomer Anthropic is a key user of Google's cloud-provided Tensor technology.
Kevin Scott, Microsoft's chief technology officer, has again stated that his company aims to increase its use of proprietary AI chips, thus decreasing its dependence on Nvidia's commercial offerings.
None of this dynamic is of any tangible benefit to Qualcomm, just as none of it poses a direct or immediate threat to Nvidia. Indirectly, however, at the very least, it confirms that Nvidia's leadership of the AI semiconductor market is fading. There are finally alternatives out there that key players in the industry are choosing. Qualcomm's entry into the race only adds to the mix of choices that chip away at Nvidia's dominance.
Chipping away at the long-standing bullish argument
The challenge for investors here is largely just one of timing and relativity.
Clearly, competitors are coming to the market, but it could take years for the entire AI data center industry to wean itself from Nvidia's wares, which it's become very familiar with. And the artificial intelligence hardware market is also still growing like crazy in the meantime. Even if it's winning less business in the future, Nvidia could still win enough of this growth to continue pumping up its top and bottom lines. Ditto for AMD.
Read between the lines, though, through a more nuanced lens. Like weight-loss drugs, e-commerce, solar panels, electric vehicles, and a slew of other industries, the capitalism-driven marketplace isn't going to let a single powerhouse dominate a lucrative business like this one forever.
It's a prospective problem for Nvidia shareholders largely because much of the stock's premium pricing of late has been rooted in its dominance of the AI processor market. Now that reason is starting to crumble, even if only a little for now. Sheer uncertainty can take a surprisingly sizable toll on any stock's value.
That being said, while Qualcomm's entry into the artificial intelligence chip business is yet another argument against sticking with a stake in Nvidia, in and of itself, it isn't a reason to step into a position in Qualcomm. Although it has one customer lined up -- Saudi Arabia's AI company Humain -- other players may not be in any particular hurry to test-drive its fairly new tech. The company's foray into this market is simply going to further democratize the AI chip industry.
