Investors in Nvidia stock got a grim warning from Apple and Amazon

Semiconductor company Nvidia (NVDA 3.54%) dominates the artificial intelligence (AI) chip market. In fact, analysts estimate that its GPUs account for up to 95% of AI chip sales. But history is littered with cautionary tales of the downfall of dominant brands that failed to maintain their technological leadership.

IBM was once a highly regarded computing company for its mainframes and storage solutions, but failed to innovate in cloud computing and PCs. Cisco it was briefly the world’s most valuable company when the growth of the Internet drove demand for its networking products, but it no longer ranks in the top 50 because it failed to innovate.

These are just two examples from a long list that includes AOL, Blackberryblockbuster, Kodakand MySpace. To be clear, Nvidia is in no immediate danger of joining that list, but history says shareholders would be foolish to dismiss the idea entirely. Indeed, recent warnings from Apple (AAPL 0.04%) and Amazon (AMZN 2.34%) make it clear that Nvidia is not immune to competition.

Here are the important details.

Apple’s warning to Nvidia shareholders

Earlier this year, Apple announced a set of artificial intelligence (AI) capabilities for iOS and macOS devices called Apple Intelligence. Features include text drafting and revision, image generation and notification summarization, as well as a more capable version of the Siri personal assistant. Apple Intelligence will be released at the end of October.

In July, Apple published a white paper stating, “Apple Intelligence consists of multiple high-capacity generative models that are fast, efficient, specialized for our users’ everyday tasks, and can adapt on the fly to their work current”. The paper also detailed how two of those models — one running on devices for simple tasks and another running in private data centers for more sophisticated tasks — were trained.

Importantly, Apple did not use Nvidia graphics processing units (GPUs) to develop its large language models. It used custom silicon called tensor processing units (TPUs) designed by Alphabetof Google and Broadcom. Notably, Broadcom also helps other companies design custom AI chips, including Meta platformsOpenAI and ByteDance, according JPMorgan Chase.

Here’s the bottom line: Apple’s decision to use TPUs rather than GPUs to train its AI models is a warning that there are viable alternatives to Nvidia. The relative importance of this decision has yet to be determined. If Apple Intelligence is wrong, it could turn into a cautionary tale about what happens when companies stray from the industry standard. But if Apple Intelligence is well received by consumers, Apple’s decision to use TPUs may inspire other companies to do the same.

Amazon’s warning to Nvidia shareholders

Alphabet’s Google isn’t the only public cloud to develop custom AI silicon. Amazon Web Services (AWS) has done the same. Its custom chips — Trainium for AI training and Inferentia for AI inference — aren’t designed to eclipse Nvidia GPUs in performance alone, but rather to offer customers a more cost-effective alternative.

Alphabet and Amazon have deep partnerships with Nvidia. Both companies offer compute instances powered by Nvidia GPUs, and that’s not going to change anytime soon. Nvidia GPUs are the gold standard in data center accelerators, so it would be absurd not to offer this option. However, both companies saw fit to develop their own chips in parallel.

Amazon CEO Andy Jassy recently said:

“We heard loud and clear from customers that they appreciate better performance for the price. That’s why we’ve invested in our own custom silicon in Trainium for training and Inferentia for inference. And the second version of those chips, the Trainium that will come later at this point. year, they are very convincing in terms of price performance. We are seeing significant demand for these chips.”

Here’s the bottom line: Some companies will happily pay a premium for Nvidia GPUs, but demand for custom silicon from AWS shows that other companies will happily use slower chips to save money. In other words, AWS (like Apple) is warning investors that Nvidia will almost certainly lose market share in the future, which could squeeze the company’s margins as it struggles to compete with cheaper alternatives.