In a dramatic turn of events, Nvidia, once hailed for dispelling fears of an artificial intelligence bubble with its stellar quarterly results, finds its dominance in the AI chip market under siege. While Nvidia’s shares have stagnated, Alphabet, Google’s parent company, has seen its stock surge nearly 10%, narrowing the market capitalization gap between the two tech giants from $3 trillion to approximately $570 billion.
The shift in market dynamics raises questions about Nvidia’s long-term stability. Despite its strong quarterly performance, skepticism remains, particularly from investors like Michael Burry, known for “The Big Short,” who question the sustainability of Nvidia’s numbers. The broader concern is whether Nvidia’s near-monopoly on AI hardware truly reflects the commercial viability of AI technology itself.
Investments and Industry Structure
The AI sector is witnessing unprecedented investment levels, driven by the insatiable demand for Nvidia’s chips. However, the returns on these investments remain uncertain, fueling speculation about a potential AI bubble. OpenAI, the company that ignited the AI frenzy with ChatGPT, is now facing serious competition for the first time since its launch three years ago.
Initially, OpenAI and other startups funded their ambitions through equity. As their commitments grew, they turned to circular financing, with Nvidia investing in its customers, and tech giants like Oracle and Microsoft making significant commitments to Nvidia’s chips and OpenAI’s AI products. As funding needs escalated, these companies began raising debt, some of it off the balance sheet, to support their massive spending commitments.
“That’s a pretty fragile industry structure, which revolves around Nvidia and OpenAI at its centre.”
Google’s Strategic Moves
OpenAI’s recent “code red” memo, reported by The Information, underscores the urgency of improving its ChatGPT chatbot amid rising competition. This competition not only threatens OpenAI but also Nvidia’s dominance and its substantial margins, which hover around a gross margin of 70%.
Google has emerged as a formidable challenger. Late last month, it was revealed that Google is in talks to sell its internally developed AI chips to Meta in a multibillion-dollar deal, potentially weakening Nvidia’s grip on the AI hardware sector. Google’s recent release of its chatbot, Gemini 3, is considered a strong competitor to OpenAI’s ChatGPT 5.
Google’s challenge is multifaceted, as it is also one of the four hyperscalers that account for over 60% of Nvidia’s revenue. The development of Google’s own chips adds another layer of complexity to Nvidia’s market position.
Amazon Joins the Fray
Meanwhile, Amazon, the world’s largest cloud service provider, has begun installing its latest chip, Tranium3, in data centers. Although Google’s TPUs and Amazon’s chips are not as versatile as Nvidia’s GPUs, they excel in inference, where AI models deploy their knowledge. This shift in market focus poses a significant challenge to Nvidia’s dominance.
“While they can’t do as much as Nvidia’s chips, what they can do they do well and far more cheaply and faster, with less energy consumed.”
The Road Ahead for Nvidia and OpenAI
Nvidia’s response to Google’s challenge was uncharacteristically defensive, posting on X that it welcomed Google’s success but emphasized its technological lead. Google, with its substantial financial resources, is now a key player in the AI race, boasting net cash of around $100 billion and annual cash flows of $150 billion to fund its ambitions.
OpenAI, in contrast, relies heavily on equity raisings, vendor financing, and debt, with a revenue run-rate of only about $20 billion. Google’s integrated suite of products, or “stack,” provides it with a strategic advantage in boosting the adoption of Gemini, which has seen its user base grow from 400 million monthly active users in May to over 650 million today.
While ChatGPT remains dominant with approximately 800 million weekly active users, the gap is closing. Google’s rapid advancement in AI, combined with efforts by hyperscalers to diversify their supplier base and reduce reliance on Nvidia, suggests a potential reshaping of the AI landscape.
“It’s potentially a game-changing moment for AI, one that some have dubbed a ‘DeepSeek moment.’”
This evolving scenario presents challenges for both Nvidia and OpenAI. Fragmented customer bases, reduced potential revenues, and increased capital costs could complicate their paths forward. However, Nvidia is likely to retain its position as the leading chip provider, albeit with pressure on its margins and growth rate.
The AI sector’s future remains uncertain, with the potential for significant shifts in market dynamics. As the industry rationalizes, Nvidia and OpenAI must navigate a complex landscape to maintain their leadership positions.
