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Written by Sean Williams for The Motley Fool->
Artificial intelligence (AI) is a multitrillion-dollar global opportunity, and Nvidia has been leading the charge for several years.
Although Nvidia's GPUs are unmatched on a compute basis, they are vulnerable to internal competition.
Alphabet's rapidly accelerating sales for Google Cloud following AI integration signal a shift in focus away from hardware toward AI applications.
No trend has captured the attention and capital of investors over the last three years quite like the evolution of artificial intelligence (AI). Empowering software and systems with the tools to make rapid, autonomous decisions is a multitrillion-dollar opportunity across most sectors and industries around the globe.
To date, graphics processing unit (GPU) titan Nvidia (NASDAQ: NVDA) has heralded the charge. But we may be witnessing a changing of the guard, courtesy of Google's parent company, Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), whose first-quarter operating results indicate we've reached a critical phase of AI's evolution.
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When 2023 began, Nvidia was a $360 billion company of fringe importance. But in the years that have followed, it's vaulted to the top of the pedestal and consistently maintained its pole position as America's largest public company. Last week, its market cap topped $5 trillion.
The catalyst fueling these outsize returns is the insatiable demand for Nvidia's GPUs. In addition to Nvidia holding a virtual monopoly on enterprise data center GPUs, its external rivals aren't particularly close to matching or surpassing the compute capabilities of its several generations of AI chips, including Hopper, Blackwell, and Blackwell Ultra.
CEO Jensen Huang has done everything he can to ensure that Nvidia is synonymous with artificial intelligence. Specifically, Huang intends to bring an advanced GPU to market annually, ensuring that external competitors can't match its pace of innovation or compute capabilities.
But Nvidia is vulnerable from within. Several of its top customers by net sales are developing AI chips for their data centers, which may directly and adversely affect the GPU scarcity that's fueling its premium pricing power.
As of the closing bell on May 1, Alphabet had closed the market cap gap behind Nvidia to approximately $150 billion. We're one solid up day for Alphabet and/or one down day for Nvidia away from Alphabet taking Nvidia's crown as Wall Street's most consequential AI stock.
Mind you, Alphabet is, arguably, a more complete company than Nvidia. Whereas data center revenue accounted for more than 91% of Nvidia's fiscal fourth-quarter sales, Alphabet holds a virtual monopoly in internet search traffic through Google, premium ad pricing power with the second-most-visited website, YouTube, and is the brainchild behind the world's No. 3 cloud infrastructure service platform, Google Cloud.
Alphabet's first-quarter operating results signal a changing of the guard within the AI arena. While hardware and the data center build-out remain an important story, the 63% sales growth reported for Google Cloud shifts the focus to AI applications and generative AI/large language model integration. Google Cloud's rapidly accelerating sales growth is putting the spotlight on AI applications and their role in optimizing sales and profits.
While Alphabet is clearly thriving, history shows that every next-big-thing technology spanning more than three decades has endured an early stage bubble-bursting event. In other words, investors have a terrible habit of overestimating the optimization of new technologies (i.e., AI applications).
We appear to be entering a new era in the evolution of AI -- and Alphabet might be the most important company in this scenario.
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Sean Williams has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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