NVIDIA's sustained high AI-chip margins attract competitive entry from AMD and Google.
Nvidia faces mounting investor concerns about the sustainability of its artificial-intelligence spending surge, despite remaining the world's most valuable company. The chipmaker's stock has declined 12% since peaking at a $5 trillion market cap in late October, though the Nasdaq composite fell only about 2% in the same period. Trading at approximately 26 times projected earnings for the next four quarters—close to its lowest multiple over the past five years according to FactSet—Nvidia's shares now appear relatively cheap. However, this valuation assumes earnings projections that could face pressure if heightened competition forces the company to lower prices.
Nvidia's profitability levels remain extraordinary by industry standards. Over the last four quarters, the company generated a little over $110 billion in operating income, equating to about 59 cents of operating profit for every dollar of revenue. Its gross margins stand at 70% on an annual basis, compared with an average of around 62% for the five-year period before sales exploded in mid-2023 from AI demand, which the company attributed to "a significant amount of software and complexity" in its data-center products. By contrast, TSMC—the Taiwan manufacturing powerhouse that actually makes most of Nvidia's chips—produced an operating margin of just under 50%, while the average for companies on the PHLX Semiconductor Index hovers around 25%. Fabless chip companies including Qualcomm, Advanced Micro Devices, and Marvell command annual gross margins in the low 50s range.
Competition is intensifying from multiple directions. AMD is gearing up to challenge Nvidia's dominance with MI450 chips planned to start shipping next year, already securing OpenAI as a major customer. AMD Chief Executive Lisa Su announced that more major customers are coming and has publicly committed to surpassing 35% in annual pro forma operating margins over the next three to five years, compared with 22% now. Additionally, Google is entering the AI chip market by selling its in-house-designed tensor processing unit (TPU), while Amazon announced its latest Trainium 3 chip on Tuesday.
Google's competitive position is strengthened by its substantial financial resources. Parent company Alphabet's operating cash flow of $151.4 billion over the past four quarters stands as the highest on the S&P 500. The search giant already spends about $20 billion a year on Nvidia's chips and remains a major customer. Securing a customer like Meta Platforms, which is a major Nvidia customer but has ambitious AI needs to support Mark Zuckerberg's goal of developing "superintelligence" before rivals like OpenAI, would represent a significant win for Google's TPU efforts.
Wall Street analysts are not panicking about Nvidia yet, with Morgan Stanley's Joe Moore writing that "in the near term, Meta using TPUs doesn't materially affect our viewpoint on Nvidia despite the narrative headwind it creates." However, investors remain focused on Nvidia maintaining gross margins in the 70% range even as costs for key components like memory continue rising. The combination of Google's latest chip advances, AMD's new offerings, and Amazon's latest products demonstrates that competition is accelerating in a market Nvidia has long dominated. Nvidia's ability to maintain pricing power and its high margins will only grow more difficult to sustain.