Blockchain Edge Data Analytics
Blockchain Edge Data Analytics
Nvidia's stock took a hit recently, and the reason is pretty straightforward: Google and Meta are reportedly discussing a multibillion-dollar AI chip deal. The implication? Nvidia could soon be facing serious competition from its own clientele. The stock dipped as much as 6.5% on the news. A knee-jerk reaction, sure, but one rooted in a legitimate concern.
For now, Google primarily rents access to its tensor processing units (TPUs) through Google Cloud. That's the current model. The potential shift, as The Information reported, involves Google selling TPUs, potentially grabbing 10% of Nvidia's annual revenue. Seems optimistic, but that's the claim. Shares of AMD, Nvidia's rival, also felt the chill, dropping over 8%.
This isn't just about one deal, though. It's a symptom of a larger trend. Amazon and Microsoft are also developing their own AI chips. Amazon just finished a massive data center project, renting out half a million of its custom AI chips to Anthropic. Google also has a big deal with Anthropic, and OpenAI reportedly tested Google's AI chips this summer. The plot thickens.
The obvious question is: Can Nvidia maintain its dominance when its biggest customers are actively working to undermine it? It's like selling shovels during a gold rush, only to find your customers are starting their own shovel factories.
DA Davidson noted in September that "notable frontier AI labs" had shown "considerable interest" in purchasing Google's TPUs. They even estimated Google's TPU business and DeepMind could be worth $900 billion. That's a hefty valuation, and it suggests this isn't just a passing fad.
Nvidia has been under fire for what some call "circular AI deals"—investing in its own customers. Michael Burry, of "Big Short" fame, is betting on Nvidia's decline, comparing the AI market to the dot-com bubble. Strong words, but not entirely unfounded. There's definitely a frothiness to the market.
Here's where things get interesting, and where the standard narrative starts to break down. Nvidia sent a memo to Wall Street analysts over the weekend to address these concerns. I haven’t seen the full memo myself, but its existence is telling. Companies don't typically issue memos unless they feel a need to control the narrative.
The core issue isn't just about competition; it's about margins. Nvidia currently enjoys incredibly high margins on its AI chips (estimated around 70-80%). If Google and others start producing their own chips, even if they don't completely displace Nvidia, they could put downward pressure on those margins. That's the real threat.
Consider this: Even if Google only captures, say, 5% of Nvidia's revenue (instead of the claimed 10%), and even if Nvidia continues to grow overall, a significant margin compression could still impact the bottom line. A 10% revenue decline with a 30% margin is a far different beast than a 10% revenue decline with an 80% margin.
And this is the part of the analysis that I find genuinely puzzling. Everyone is focused on revenue, but very few are discussing the long-term implications for Nvidia's profitability. Are we sure that Nvidia is going to be able to maintain its margins with increased competition? The analysts seem to be drinking the Kool-Aid.
It's also worth asking: What are the actual performance metrics of Google's TPUs compared to Nvidia's GPUs? The narrative assumes they are comparable, but I've yet to see any independent, third-party benchmarks that definitively prove that. Claims are one thing; verifiable data is another.
Nvidia's narrative is starting to crack. The idea that they can maintain their current level of dominance in the face of increasing competition from their own customers is, frankly, absurd. The market is pricing in continued hyper-growth and sky-high margins. I'm betting on a correction.
