Amazon's $50 Billion AI Chip Business: A Significant Threat to Nvidia?

Nvidia (NASDAQ: NVDA) has dominated the market for artificial intelligence (AI) chips over the past three years. The company has been rewarded for its efforts. Revenue and earnings have soared, as has the tech giant's stock price. However, some investors are worried that Nvidia will eventually face stiff competition that will erode its pricing power and market share. So far, that hasn't happened: AMD, Nvidia's main competitor, remains a distant second.

But the threat to Nvidia could come from an unexpected source: Amazon (NASDAQ: AMZN). Let's consider why and discuss the implications for Nvidia's prospects.

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Amazon's booming AI chip business

Amazon is the leading cloud computing company and provides a wide range of services, including the ability to train and run AI models. The tech giant has built its own chips, including its Trainium franchise, specifically designed for training. Amazon's customers can train and run models on its internally developed chips or on Nvidia's. And according to CEO Andy Jassy, Amazon's chips are very popular. As he said in a recent letter to shareholders:

If our chips business was a stand-alone business, and sold chips produced this year to AWS and other third parties (as other leading chips companies do), our annual run rate would be ~$50 billion. There's so much demand for our chips that it's quite possible we'll sell racks of them to third parties in the future.

This could pose problems for Nvidia since Amazon is likely one of its largest clients. We can't be sure that Amazon is one of those two direct customers that accounted for 36% of Nvidia's revenue during its latest fiscal year. But the numbers -- including Amazon's $200 billion projected capex spending in 2026 -- strongly suggest that the e-commerce specialist is, if not one of these two direct customers, not too far behind them.

If Amazon's chips can match Nvidia's performance -- or at least continue to improve -- Nvidia could lose a meaningful amount of sales from Amazon, which would be a major blow to the chipmaker.

Why Nvidia's shareholders can relax

The fact that one of Nvidia's biggest customers could also be a serious competitor will continue to pose a threat to the business. However, for now, there isn't too much to worry about. Here's why: the performance of Nvidia's chips remains unmatched. True, this claim may not hold that much weight when it comes from CEO Jensen Huang. He is hardly an unbiased source. Thankfully, there is a way to verify it independently.

Consider MLPerf benchmarks, created by experts and industry insiders as an unbiased way to measure the performance of machine learning training and inference hardware and software. According to the latest results, Nvidia continues to dominate.

Amazon's Trainium may be an excellent cost-effective option, but Nvidia's chips remain the market leaders in raw performance, which is especially important for training and deploying the most advanced AI models -- and some corporations are more than happy to pay a premium price for that. Nvidia is doubling down. It will release a new platform, Vera Rubin, in the second half of the year. Vera Rubin's performance will be better than that of Nvidia's Blackwell.

This is important since the company thinks we are entering a new era in the AI revolution, where companies increasingly rely on agentic AI, or autonomous AI systems that can plan and execute tasks without direct human interaction. Running agentic AI requires more computing power than, say, chatbots. As demand for more power rises amid corporations' efforts not to get left behind by the shift to agentic AI, Nvidia's chips should remain in high demand.

And we haven't even touched on an important part of the company's competitive edge: Its CUDA platform is the de facto parallel computing platform and programming model for AI. That is an advantage difficult to match (even if Amazon's chips could catch up to Nvidia's in performance), which should allow Nvidia to remain the industry leader for the foreseeable future. So, despite Amazon's efforts, Nvidia's business is just fine and could still deliver excellent returns over the medium term. The stock is a buy.

Prosper Junior Bakiny has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, and Nvidia. The Motley Fool has a disclosure policy.