Will Amazon's AI Chip Business Be a Threat to Nvidia?
Amazon is exploring sales of its in-house Trainium AI chips to external customers, potentially increasing competition for Nvidia. However, Amazon remains a major Nvidia customer due to the superior versatility and CUDA ecosystem of Nvidia's hardware. Nvidia continues to benefit from strong industry tailwinds, including growth in agentic AI and CPU revenue opportunities. Analysts conclude that despite Amazon's efforts, Nvidia will likely maintain its market dominance and financial strength.
According to reports, Amazon (AMZN +0.69%) is in early talks to sell its Trainium AI chips to external customers, rather than just stacking its own data centers with these in-house-made chips for the benefit of its cloud computing clients. This shouldn't come as a surprise: Amazon's CEO, Andy Jassy, had already said that the company could be moving in that direction. However, one potential loser from Amazon's decision to sell its AI chips is Nvidia (NVDA 3.99%), which will now face more competition for dominance in the AI chip market. Should Nvidia's shareholders be worried?
Image source: The Motley Fool.
The advantage of Amazon's AI chips
Amazon started designing its own chips in-house for several reasons. First, to help decrease its exposure to Nvidia's hardware. As the market leader in offering best-in-class GPUs (Graphics Processing Units) for training and deploying artificial intelligence (AI) models, Nvidia has sometimes faced supply constraints. Amazon, and, for that matter, other hyperscalers, have found that custom-made chips can help them sidestep this issue. Second, for Amazon, relying on Trainium is often more cost-effective. According to the company, Trainium2 offers 30% better price performance than comparable GPUs.
NASDAQ: AMZN
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That means the cloud computing giant can reduce expenses and boost margins thanks to its Trainium franchise. It could offer the same value proposition to other companies. Amazon has said its AI chip unit would have an annual run rate of $50 billion if it were a stand-alone business. That's not a lot for a company that generates well over $100 billion in quarterly sales, but Amazon also said this segment is growing at triple-digit year-over-year rates, much faster than the rest of the business. And if the AI boom continues, it could become a meaningful growth driver for Amazon. But what does all of this mean for Nvidia?
Nvidia should be just fine
It is telling that despite the advantage of designing its own AI chips, Amazon continues to be a major Nvidia customer. As Jassy said during the company's first-quarter earnings conference call:
While the largest number of AI chips we are bringing in are Trainium, we continue to have a deep partnership with NVIDIA. We have immense respect for them, continue to order substantial quantities, will be partners for as long as I can foresee, and we will always have customers who want to run NVIDIA on AWS.
The lesson here is that Nvidia's hardware is still the best and most versatile. The company also benefits from a wide moat thanks to its CUDA ecosystem.
NASDAQ: NVDA
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Even as companies seek alternative AI chips, the rapidly growing AI industry should provide a strong tailwind to Nvidia while also supporting multiple winners. Further, Nvidia is tapping into an important new growth opportunity thanks to the rise of agentic AI. With AI agents running on CPUs (Central Processing Units), Nvidia estimates it will generate $20 billion in stand-alone CPU revenue by the end of the year and begin making headway into a $200 billion total addressable market.
Here's the bottom line: Even if Amazon's AI chip business makes progress, Nvidia will likely still reign supreme and continue delivering outstanding financial results. That's why the semiconductor stock remains a buy.
