AI Stock Market Shake-Up: Amazon and Microsoft Challenge Nvidia's Dominance

Prediction: 2 Artificial Intelligence (AI) Stocks Will Be Worth More Than Nvidia by 2029 | The Motley Fool

Artificial intelligence rockstar Nvidia currently has a market capitalization of $2.9 trillion, but the chipmaker has flitted back and forth around $3 trillion for several months. Only two other publicly traded U.S. companies have crossed that threshold: Apple and Microsoft. Looking ahead, Amazon (AMZN 3.71%) and Alphabet (GOOGL 0.99%) (GOOG 1.05%) could surpass Nvidia's current valuation to become $3 trillion companies by 2029. What that means for shareholders is detailed below. Here's what investors should know about Amazon and Alphabet. Amazon has three important growth engines in e-commerce, digital advertising, and cloud computing. Specifically, it runs the most popular online marketplace in the U.S. in terms of visitors, and it accounts for 41% of domestic retail e-commerce sales. The company also has a vast logistics network that supports fulfillment services for sellers and rapid delivery for buyers, which reinforces its leadership position. Amazon is the third-largest ad tech company in the world, but it dominates retail media, a term that refers to digital advertising services provided by retailers. That matters because retail media is one of the fastest-growing verticals in the digital ad market, according to eMarketer. Additionally, Amazon recently unlocked a new revenue stream by introducing advertising on Prime Video. Finally, Amazon Web Services (AWS) is the largest public cloud, and its market share rose one point to 32% in the June quarter. Those share gains reflect aggressive investments in artificial intelligence (AI) services. "During the past 18 months, AWS has launched more than twice as many machine learning and generative AI features into general availability than all of the other major cloud providers combined," CEO Andy Jassy recently told analysts. Going forward, eMarketer estimates U.S. retail e-commerce sales will grow at 9% annually through 2028, while retail media spending climbs at 24% annually during the same period. Meanwhile, the International Data Corp. (IDC) expects public cloud spending to compound at 19% annually through 2028. That gives Amazon a good shot at double-digit sales growth over the next 4.5 years. Here's how that could earn Amazon a $3 trillion valuation by 2029: Today, the company is worth $1.9 trillion. Revenue could reasonably increase at 12% annually through the end of 2028, in which case the company would hit $3 trillion in market value if shares traded at 3 times sales, a slight discount to its current valuation of 3.1 times sales. Alphabet has two important growth engines in digital advertising and cloud computing. The company owns six products that serve more than two billion monthly users. Chief among them are the most popular streaming video platform (YouTube) and leading internet search engine (Google Search). Those platforms let Alphabet efficiently collect information and deliver data-driven advertising to consumers. Alphabet will account for 27.4% of global digital ad spending this year, per eMarketer. That puts the company more than five percentage points ahead of Meta Platforms, the second largest digital advertiser in the world. Importantly, while Alphabet is losing share across the open internet, dominance in internet search and streaming video should keep it ahead of the competition for the foreseeable future. Meanwhile, Google Cloud is the third-largest public cloud, and its market share increase one point to 12% over the past year. Those share gains reflect its status as a leader in AI infrastructure solutions and large language models. "Year to date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues, and are being used by more than 2 million developers," CEO Sundar Pichai told analysts on the second-quarter earnings call. Going forward, eMarketer estimates global digital ad spending will grow at 10% annually through 2028, and the IDC expects public cloud spending to compound at 19% annually during the same period. That gives Alphabet a good shot at double-digit revenue growth over the next 4.5 years, with potential upside from its subsidiary Waymo, a company that operates an autonomous ride-hailing network in several U.S. cities. Here's how that could earn Alphabet a $3 trillion valuation by 2029. The company currently has a market capitalization of $2 trillion. Revenue could reasonably grow at 10% annually through the end of 2028, in which case the company would hit $3 trillion in market value if shares traded at 6 times sales, a modest discount to its current valuation of 6.4 times sales.

Amazon Sent a Big Warning to Nvidia Shareholders. Is the AI Stock in Trouble? | The Motley Fool

Nvidia dominates the artificial intelligence chip market, but the company is not invincible. Nvidia (NVDA 1.51%) shares have surged 145% over the past year due to the semiconductor company's critical position in the artificial intelligence (AI) economy. Specifically, Nvidia graphics processing units (GPUS) are the industry standard in accelerating complex data center workloads like training machine learning models and running artificial intelligence applications. Earlier this year, The Wall Street Journal reported, "Nvidia's chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%." Some analysts believe Nvidia controls as much as 95% of the AI chip market. But Amazon (AMZN 3.71%) recently issued a warning for Nvidia shareholders. Amazon CEO Andy Jassy recently told analysts no single artificial intelligence chip will fit every use case, simply because companies and developers want optionality. "You saw this several years ago when some companies tried to argue that TensorFlow will be the only machine learning framework that mattered, and then PyTorch and others overtook it," Jassy explained. Nvidia consistently sets performance records at the MLPerf benchmarks, objective tests that measure how well AI systems perform training and inference tasks. But Nvidia graphics processing units (GPUs) are also very expensive. Its H200 GPUs cost up to $40,000 each, and full server racks cost millions of dollars. Jassy believes there is robust demand for products between the two extremes, so Amazon is developing custom AI silicon. "We have a deep partnership with Nvidia and the broadest selection of Nvidia instances available, but we've heard loud and clear from customers that they relish better price performance," Jassy told analysts. "It's why we've invested in our own custom silicon. Trainium for training and Inferentia for inference." Importantly, Amazon has previous experience in developing custom chips. The company has been designing generalized central processing units (CPUs) called Graviton processors for several years. Those chips are based on Arm architecture, and they offer 30% to 40% better price performance versus the leading x86 processors from AMD and Intel, according to Jassy. Amazon has the same goal with its custom AI silicon. Trainium and Inferentia are not meant to challenge Nvidia GPUs on performance alone, but rather to provide customers with a cost-efficient alternative. Some companies would rather pay a premium for the fastest AI chips, but others would gladly use slower chips to save money. Amazon is not the only company that is designing custom silicon. Broadcom develops custom AI chips for Alphabet's Google and Meta Platforms, and it won a third major customer earlier this year. The company has not named the customer, but Reuters identified it as TikTok parent ByteDance. Additionally, J.P. Morgan analysts recently speculated that Broadcom has also secured a contract to build custom AI chips for OpenAI, bringing its total to four major customers. Joseph Moore at Morgan Stanley expects that trend to continue. "Hyperscalers, including Amazon, Google, and Meta, use custom silicon for their data centers due to cost and energy constraints in AI computing. As hyperscalers continue to invest in AI infrastructure, we expect increased demand for energy-efficient and cost optimizing custom chips to outpace the growth of general-purpose GPUs," he wrote in a note to clients. Here's the big picture: While Nvidia dominates the AI processor market today, input from Amazon and Morgan Stanley indicates the company is virtually guaranteed to lose market share in the years ahead. That does not mean Nvidia will lose its leadership position in the AI chip market. I doubt that will happen. But some spending will inevitably be redirected away from expensive Nvidia GPUs as more cost-efficient alternatives are made available. Additionally, Nvidia will probably lose some pricing power as it fights to maintain its market share. Indeed, the company's gross margin declined 330 basis points sequentially in the most recent quarter, despite reporting 122% revenue growth on strong demand for its AI chips. Investors should expect that trend to continue in the coming quarters. However, Nvidia is not necessarily a bad investment. In fact, Wall Street still expects its earnings to increase at 37% annually over the next three years. That consensus estimate makes the current valuation of 56 times earnings look reasonable. Those figures give a PEG ratio of 1.5, which is well below the three-year average of 3.1. Personally, I think investors looking to capitalize on the artificial intelligence boom should have a position in Nvidia, and I am not alone. A recent note from Jim Kelleher at Argus reads, "We believe that most technology investors should own [Nvidia] in the age of deep learning, AI, and GPU-driven application acceleration."