Nvidia (NASDAQ: NVDA) has been a scorching-hot buy over the past couple of years, largely due to the key role it plays in artificial intelligence (AI). The company's AI chips are crucial for companies that are developing AI models. And Nvidia has a commanding 80% market share when it comes to AI chips. That's part of the reason why investors have remained bullish on the stock -- it's arguably the best-positioned stock to benefit from growing demand for AI.
But given how lucrative the opportunities are in AI, it's only a matter of time before more competitors emerge and fight for market share. Apple (NASDAQ: AAPL) has recently turned to one of those unexpected competitors to source chips for its new AI-powered iPhones.
Apple has bought chips from Alphabet
One of the companies that has been developing its own chips is Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). And Apple has been training its new AI system, called "Apple Intelligence," using Alphabet's custom chips, according to a research paper. The company used two versions of Google's tensor processing unit to develop its AI models, which gives iPhone users access to generative AI features, including advanced writing tools, the ability to generate images, and a Siri assistant with "all-new superpowers."
Could more competition be on the way?
Alphabet is a potentially strong competitor for Nvidia to worry about. The company has plenty of resources to work with. Last year, Alphabet generated more than $69 billion in free cash flow. It has been investing in its AI chatbot Gemini, and AI chips could provide it with yet another growth opportunity to pile money into.
The courts recently found that the company's search engine, Google, has an illegal monopoly. And depending on what the consequences of that finding are, Alphabet may soon see a huge incentive to find a new growth opportunity to pursue, as the ruling may have a detrimental effect on a key part of its business.
Beyond Alphabet, however, there are other competitors for Nvidia to worry about. Meta Platforms has been working on an AI chip of its own, as has Amazon. And investors also shouldn't forget about AMD, which is a more traditional rival for Nvidia. Although it has been late to the game, AMD has made it clear that AI is a big priority for the business, and it could also take away some sizable market share from Nvidia in the future.
Should Nvidia investors be worried?
Nvidia has generated incredible gains due to its dominance in the AI chip space. And it is working on innovating and coming out with more advanced chips to ensure it remains on top. But maintaining such a large market share can be incredibly difficult, especially with so many big tech companies out there with deep pockets to contend with. They aren't simply going to ignore such a massive opportunity in AI chips.
The company's revenue has taken off over the past year, with Nvidia's growth rate in recent quarters being well in excess of 200%. Those kinds of numbers, while extremely impressive, are also extremely difficult to maintain. At some point, Nvidia's growth rate will start to come down, especially if more competition emerges in the field. And its high-priced chips may also need to come down in price if that's the case, which may lead to both a slowing growth rate and smaller profit margins than the 50%-plus margins it has been averaging of late.
Is Nvidia's stock still a buy?
Nvidia's stock has been giving back some gains in recent weeks, but it's still a top company to invest in if you want exposure to the red-hot AI market. While other companies may try to take market share from Nvidia, that doesn't mean that they will be able to do so overnight.
Nvidia is still in an excellent position to continue growing, but I would expect its growth rate and margins to come down a bit in future quarters, especially as companies potentially reduce AI spending due to a possible economic slowdown. Nvidia's stock may struggle in the near term, but as long you're willing to hang on for the long term, it can still make for a good buy. Still, you should brace 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, a former director of market development and spokeswoman for Facebook and sister to 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 has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
