Nvidia May Have Just Eliminated Its Biggest Risk

Nvidia (NASDAQ:NVDA) has been the artificial intelligence (AI) chip leader since the earliest days of this technology boom. This is because the company wisely chose to tailor its graphics processing units (GPUs) to the needs of AI early on -- and it's steadily innovated to remain in the lead.

Still, Nvidia isn't alone in the AI chip market. Other chip designers, such as Advanced Micro Devices and Intel, also participate. And the company even faces competition from some of its own customers, which have started making their own AI chips. A good example is Amazon (NASDAQ:AMZN), a company that has said demand for its in-house chips is so strong that chips may even become a new business for it in the future. Investors have worried that this trend -- particularly from a market giant like Amazon -- could eventually weigh on Nvidia's growth and market share.

But here's some good news: Nvidia may have just eliminated this enormous risk. Let's check out the details.

Image source: Getty Images.

Early leadership in GPUs

First, though, let's catch up quickly on the Nvidia story so far. As mentioned, Nvidia built its leadership in GPUs early, establishing itself as the go-to destination for companies seeking AI compute. Nvidia has expanded well beyond this single chip and today offers a wide range of AI products and services -- it's even developed platforms specifically for the needs of certain industries, from healthcare to automotive.

All of this has helped power the company's earnings to record levels quarter after quarter. And this continued into the latest period, with revenue jumping 106% to $96 billion and profit surging 126% to $59 billion.

Still, the major risk of competition has remained: Fellow chip designers like AMD have seen revenue explode higher, while Amazon has spoken of soaring demand for its in-house chips. Amazon chief Andy Jassy even said in the latest shareholder letter that demand is so high the company may sell racks to third parties down the road. And Jassy emphasized how Amazon is lowering its costs by using its own chips rather than relying exclusively on others like Nvidia.

That said, however, it's important to note that Amazon's chip efforts may not translate into a headwind for Nvidia. And this brings us to the latest good news.

AWS and Nvidia

Amazon Web Services (AWS), Amazon's cloud computing unit, has expanded its partnership with Nvidia, agreeing to buy an additional 2 million GPUs over the next two years. In a CNBC interview, Nvidia chief Jensen Huang said the deal includes the potential purchase of "millions of CPUs" too. These are central processing units, the main chip in most computers, and are seen as a key chip involved in powering agentic AI. Nvidia is new to the stand-alone CPU market but is making a grand entrance with its Rubin platform -- the company predicts $20 billion in stand-alone CPU revenue this year and aims to be a leader in the space.

All of this shows that Amazon, fully confident about the strength of its own chip program, still continues to heavily invest in Nvidia chips. This suggests there is plenty of room for others -- from chip designers to general tech giants -- to make their own chips and generate growth without upsetting Nvidia's leadership or revenue growth opportunity.

Amazon is a particularly good example to consider because of the size of its custom chips business -- this business delivered a $25 billion annual revenue run rate in the latest quarter. While this growth is strong, Nvidia remains a key player in the Amazon chip story, as we can see through this expanded agreement.

What does this mean for you as an investor? Though Nvidia faces competition, this market leader is very likely to hold onto its top position. Amazon's news shows that even amid its own chip successes, it continues to rely on Nvidia's latest innovations. This illustrates the strength of Nvidia's platform -- and offers investors a great reason to buy and hold onto Nvidia stock.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Intel, and Nvidia. The Motley Fool has a disclosure policy.