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Few companies have benefited more from the artificial intelligence megatrend than Nvidia (NASDAQ: NVDA). The company has leveraged its market-leading GPU design capabilities to capture a massive share of the rapidly expanding AI compute market. It's built an entire ecosystem around its chips, ensuring it remains a key component of future data center buildouts.
And Amazon (NASDAQ: AMZN) is one of its largest customers. The online retailer is also the largest public cloud computing platform, renting compute capacity to enterprise customers. It plans to spend about $200 billion building data centers and outfitting them with chips this year, up from $131.8 billion last year. A large portion of that spending will go toward chips, including Nvidia's latest GPUs and ancillary chips.
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But it's not all good news for Nvidia. Amazon CEO Andy Jassy also shared a surprising revelation during the company's first-quarter earnings call.
During the previous quarter, Amazon and Nvidia agreed to a deal that will have Amazon take delivery of 1 million Nvidia GPUs by the end of 2027. The deal also includes other Nvidia chips and networking equipment.
Demand from Amazon Web Services (AWS) will generate tens of billions of dollars in revenue over the next two years for Nvidia. Meanwhile, Amazon can lock down supply and pricing for GPUs and secure the capacity its customers demand.
"We will always have customers who want to run Nvidia on AWS," Jassy said during Amazon's first-quarter earnings call. Indeed, Nvidia's CUDA software has locked many developers into using Nvidia chips.
But AWS is making it easier for developers to use non-Nvidia AI accelerator chips using its Amazon Bedrock service, which provides a single API to use multiple foundation models on AWS compute. Bedrock has been gaining traction with customers, Jassy says, and a majority of all Bedrock workloads run on Amazon's custom AI accelerator, Trainium. And Jassy shared an update during the earnings call that investors could have missed, but it has some serious implications for Nvidia shareholders.
There are growing signs that Nvidia's stranglehold on the AI accelerator market is slipping. One of the most recent examples is this small note Jassy slipped in between praising Nvidia: "While the largest number of AI chips we are bringing in are Trainium, we continue to have a deep partnership with Nvidia."
Not only is Amazon adding more Trainium chips than Nvidia chips, but it's also seeing huge demand for them. Jassy said it has a $225 billion backlog for Trainium compute alone. The total backlog for AWS is $364 billion.
The fact that Amazon is now standing up more Trainium servers than Nvidia servers is bad news for Nvidia. Amazon is doing everything it can to push customers toward using Trainium, and it's working. Jassy said that using its own AI accelerators instead of Nvidia GPUs will save the company tens of billions of dollars in capital expenditures. Developing its own custom chips also creates a point of differentiation for AWS that could attract customers (thanks to lower prices) or lock customers into its platform (due to switching costs).
Both Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT) see the potential for similar benefits of cost savings and differentiation. Alphabet has seen tremendous demand for its custom TPU chips, and it's even started selling them to select customers for use in their own data centers. Anthropic recently struck a $200 billion deal with Alphabet that includes both Google Cloud compute and the direct purchase of TPUs for its own data centers. Microsoft has said it wants to use its own Maia chips exclusively as a way to expand compute capacity while keeping costs down.
The latest comment from Jassy shows the tides are turning for Nvidia. While it's maintaining strong relationships with its biggest customers, the cloud providers are increasingly shifting their purchases to their own custom hardware. With the rapid improvements in price-performance and the expanding capabilities of custom chips, Nvidia faces a major challenge unlike anything it's seen before. Nvidia's future earnings growth faces a lot of uncertainty, which is why even at a relatively low forward earnings multiple of 25x, the stock is still risky.
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Adam Levy has positions in Alphabet, Amazon, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
Amazon CEO Andy Jassy Has Good News and Bad News for Nvidia Investors was originally published by The Motley Fool