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Semiconductor company Nvidia (NASDAQ: NVDA) dominates the artificial intelligence (AI) chip market. Analysts estimate that graphics processing units account for up to 95% of AI chip sales. But history is full of cautionary tales of the demise of dominant brands that failed to maintain their technological leadership.
IBM was once a highly regarded computer company for its mainframes and storage solutions, but failed to innovate in cloud computing and PCs. Cisco was briefly the world’s most valuable company when the rise of the Internet boosted demand for its networking products, but it is no longer among the top 50 because it failed to innovate.
Those 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. Recent warnings from Apple (NASDAQ: AAPL) And Amazon (NASDAQ: AMZN) make it clear that Nvidia is not immune to competition.
Here are the important details.
Earlier this year, Apple announced a series artificial intelligence (AI) capabilities for iOS and macOS devices called Apple Intelligence. Features include composing and revising text, generating images and summarizing notifications, as well as a more capable version of the personal assistant Siri. Apple Intelligence will be launched at the end of October.
In July, Apple published a technical article stating: “Apple Intelligence consists of multiple highly capable generative models that are fast, efficient, specialized for our users’ daily tasks, and can adapt on the fly to their current activity.” The article also describes how two of these models – one running on devices for simple tasks, and another running in private data centers for more advanced tasks – were trained.
Importantly, Apple didn’t use Nvidia graphics processing units (GPUs) to develop its large language models. It used custom silicon called tensor processing units (TPUs), designed by Alphabet‘s Google and Broadcom. Notably, Broadcom is also helping other companies design custom AI chips, including MetaplatformsOpenAI and ByteDance, according to JPMorgan Chase.
The bottom line: Apple’s decision to use TPUs instead of GPUs to train its AI models is a warning that viable alternatives to Nvidia exist. The relative importance of that decision has yet to be determined. If Apple Intelligence malfunctions, it could become a cautionary tale of what happens when companies deviate from the industry standard. But if Apple Intelligence is well received by consumers, Apple’s decision to use TPUs could inspire other companies to do the same.
Alphabet’s Google isn’t the only public cloud developing custom AI silicon. Amazon Web Services (AWS) has done the same. The custom chips – Trainium for AI training and Inferentia for AI inference – are not designed to outperform Nvidia GPUs on performance alone, but rather to provide customers with a more cost-effective alternative.
Alphabet and Amazon have close partnerships with Nvidia. Both companies offer compute instances powered by Nvidia GPUs and that isn’t going to change anytime soon. Nvidia GPUs are the gold standard in data center accelerators, so it would be foolish not to offer that option. However, both companies have deemed it necessary to also develop their own chips.
Amazon CEO Andy Jassy recently said:
“We’ve heard loud and clear from customers that they value better value for money. That’s why we’ve invested in our own custom silicon in Trainium for training and Inferentia for inference. And the second versions of those chips, with Trainium coming later this year, are very compelling in terms of price performance. We see significant demand for these chips.”
The bottom line: Some companies are happy to pay a premium for Nvidia GPUs, but the demand for custom silicon from AWS shows that other companies are happy to use slower chips to save money. In other words, AWS is warning investors (as is Apple) that Nvidia will almost certainly lose market share in the future, which could put pressure on the company’s margins as it fights to compete with cheaper alternatives.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions in Amazon and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, JPMorgan Chase, Meta Platforms and Nvidia. The Motley Fool recommends BlackBerry, Broadcom and International Business Machines. The Motley Fool has one disclosure policy.
Nvidia stock investors just got a grim warning from Apple and Amazon was originally published by The Motley Fool