Amazon (AMZN +2.02%) has gained recognition worldwide for one thing in particular: its e-commerce business. The company is a leader in the space, with customers from the U.S. to Germany, India, Mexico, and many other countries rushing to Amazon to shop. Amazon has constructed a vast sourcing, seller, and fulfillment network, allowing it to focus on low prices and fast delivery.
On top of this, Amazon launched another business — back in 2006 — that would eventually dominate in its space. That’s the cloud computing unit, Amazon Web Services (AWS), which provides customers access to a wide range of services. AWS now drives Amazon’s total profit — in the latest full year, AWS made up almost 60% of the company’s operating income.
Though Amazon’s revenue and profit are hitting it out of the park, the company isn’t stopping with these two leading units and other areas such as Amazon Pharmacy or the Alexa virtual assistant business. The tech giant has spotted a new billion-dollar opportunity. Amazon has set its sights on this hot market — and it could spell trouble for Nvidia (NVDA +2.59%).
Image source: Getty Images.
Amazon’s AI efforts
So, first, before getting to this potential bad news for Nvidia, let’s talk about Amazon’s artificial intelligence (AI) efforts in recent years. AI has been a significant growth driver and is directly related to this new business opportunity.
Amazon has benefited from the AI boom because, through AWS, it offers customers a variety of AI chips and related products and services to run their workloads. Since AWS is the world’s No. 1 cloud services provider, the company didn’t have to seek out customers: They already were there — and it’s been very easy for these current customers to turn to AWS for their AI needs. All of this has helped AWS reach a mind-blowing $142 billion annual revenue run rate.
One of AWS’ key AI products is the AI chip. The cloud provider offers the latest chips from market leaders such as Nvidia, as well as Amazon’s in-house developed chips for cost-conscious customers. Now, let’s focus on this in-house chip business. Demand has exploded higher: Amazon’s Trainium2 chip is just about sold out, and Trainium3, which recently started shipping, is almost fully subscribed.
Chips for AWS
Amazon’s revenue run rate just for this chips business — including only Amazon chips and not those from third parties — has reached an annual revenue run rate of more than $20 billion. And chief executive officer Andy Jassy says this revenue level is related to the fact that it provides these chips uniquely to AWS. If it sold them to third parties, Jassy predicts the annual revenue run rate would be about $50 billion right now.
And this leads me to the potential happening that may spell trouble for Nvidia.
“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,” Jassy wrote in his latest letter to Amazon shareholders. He also wrote that Amazon’s chip business “will be much larger than most think.”
Of course, Amazon hasn’t won in every market that it’s tried to tap into in recent years, but in the case of AI chips, the company already has seen incredible demand and is generating billions of dollars in revenue. So there’s reason to be optimistic about Amazon’s chances of carving out market share if it indeed develops a stand-alone chips business.
Now let’s get to the key question: What does this mean for Nvidia? It’s important to note that Jassy emphasizes the staying power of Nvidia: AWS “will always have customers who choose to run Nvidia, and we will continue to make AWS the best place to run Nvidia,” he wrote.
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A potential rival?
AWS isn’t attempting to rival Nvidia in the premium chip market but instead aims to serve customers who want solid performance at a lower cost. These customers may not be big Nvidia users right now or might run some workloads on Nvidia and use cheaper chips for others — so a lower-priced chip isn’t directly competing with Nvidia. Customers looking for the most powerful chip around still will turn to Nvidia. Now here’s where the situation gets tricky: What this means is, if AWS launches a chips business, Nvidia must continue to innovate on an annual basis. Any possible innovation delay could result in lost market share.
So the “trouble” here is the pressure Nvidia could face to advance its innovations at a fast clip. If AWS enters this market, Nvidia’s likely to maintain its overall dominance, but it won’t have much room for error.
What does this mean for investors? It’s important to remember that Nvidia isn’t just a chip designer. The company has also built out an entire ecosystem of products and a massive base of current customers. It’s very unlikely that an Amazon chips business, even if it takes some chip market share, would unravel this empire. And Nvidia has proven its ability to innovate on a regular basis, so there’s reason to be confident it can keep up the pace. This means it’s still a great idea to buy Nvidia stock and hold onto it throughout this AI revolution.
