Nvidia (NASDAQ: NVDA) has been a very popular stock over the past few years due to the important role it plays in artificial intelligence (AI). The company's AI chips are essential to companies developing AI models, and it has a commanding 80% market share when it comes to AI chips. One of the reasons investors have remained bullish on the company's stock is because it is best positioned to benefit from the growing demand for AI.
But given how lucrative the opportunities for AI are, it's only a matter of time before more competitors emerge to compete for market share, and Apple (NASDAQ: AAPL) recently turned to one such unexpected competitor to source chips for its new AI-powered iPhones.
Apple bought chips from Alphabet
One company developing its own chips is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). According to a research paper, Apple is using Alphabet's custom chips to train a new AI system called “Apple Intelligence.” The company is using two versions of Google's Tensor Processing Unit to develop AI models, giving iPhone users access to generative AI features like advanced lighting tools, image generation capabilities, and a Siri assistant with “all-new superpowers.”
Is there a possibility that competition will increase in the future?
Alphabet is a potentially formidable rival to Nvidia. The company has a lot of resources to tap. Last year, Alphabet generated more than $69 billion in free cash flow. It's invested in Gemini, an AI chatbot, and AI chips could provide the company with additional growth opportunities and capital.
A court recently ruled that Alphabet's search engine, Google, operates an illegal monopoly, and depending on the outcome, Alphabet may soon have a big incentive to pursue new growth opportunities, as the ruling could negatively impact a key part of the company's business.
But beyond Alphabet, NVIDIA has other competitors to worry about: Meta Platforms is working on its own AI chips, as is Amazon. Investors also shouldn't forget NVIDIA's more traditional rival, AMD. AMD is a late entrant, but has made it clear that AI is a big priority for its business and could take significant market share from NVIDIA in the future.
Should Nvidia investors be worried?
Nvidia has made phenomenal profits from its dominance in the AI chip space, and it is working hard to innovate and launch more advanced chips to stay on top. However, maintaining such a large market share is very difficult, especially with so many well-funded large tech companies, and they are not going to just ignore such a huge opportunity in AI chips.
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The company's revenue has skyrocketed over the past year, with growth rates well over 200% in recent quarters. While such numbers are very impressive, they are very difficult to sustain. Nvidia's growth rate will eventually start to slow, especially if competition in the space increases. This may also force the company to cut prices on its more expensive chips, which could result in slower growth and lower margins than the 50%+ margins that have been averaging recently.
Should you still buy Nvidia stock?
Nvidia's stock has given up some of its gains in recent weeks, but it remains a top company to invest in if you want to get into the booming AI market. Other companies may try to take market share from Nvidia, but that won't happen overnight.
Nvidia is still well positioned to continue to grow, but we expect growth and profit margins to slow slightly in the coming quarters, especially as a potential economic slowdown could lead companies to cut spending on AI. Nvidia stock may struggle in the short term, but it remains a good buy as long as you're prepared to hold on for the long term. Still, you should be prepared for some challenges ahead.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, and NVIDIA. The Motley Fool has a disclosure policy.
Nvidia dominates the artificial intelligence chip market, but Apple is securing supplies from another tech giant. This was originally published by The Motley Fool.
