The nature of Artificial Intelligence developments is such that whoever sits on vast amounts of data or has the highest speed of processing data to produce meaningful results will lead the AI world. This is one reason why Big Tech has invested heavily in AI infrastructure, even though they aren't making a meaningful financial return on it yet.
Nvidia is the biggest beneficiary of the AI boom. The company has seen the demand for its GPUs skyrocket as companies race to acquire the best GPUs to improve their AI workflows. Microsoft is one such company. The biggest investor in OpenAI has spent enormous amounts of money buying Nvidia equipment, so much so that it was responsible for 20% of Nvidia's revenue in the last year. META, the second largest buyer of Nvidia GPUs accounted for less than half of the quantity that Microsoft ordered in the last year.
This reliance on Microsoft puts Nvidia at a massive risk. What does it do if MSFT switches to making in-house chips like META and Apple? And what if Microsoft prefers someone else's GPUs?
Microsoft's response to its reliance on Nvidia is simple to understand. The company may well be working on an in-house chip behind the scenes. But it isn't doing it with the same urgency as META and Apple. The reason is straightforward. Microsoft builds AI products that its end-users will utilize by accessing its API. It does not matter to the end-user which GPUs Microsoft is using, as long as the performance is the best in the industry.
So if Nvidia stopped being the best GPU company all of a sudden (an unlikely scenario), Microsoft would simply switch to whoever makes the best GPUs. According to Omdia's estimates, Microsoft bought 96,000 AMD GPUs this year while it purchased a massive 485,000 NVDA GPUs. For Microsoft, the aim is to build the best possible infrastructure and for that, the company will continue to buy from whatever company fulfills its desired specifications.
This simplifies Nvidia and Microsoft's relationship. As long as Nvidia continues to make the best GPUs, Microsoft will continue buying. Nvidia has one aim: to build the best GPUs. It has been doing it till now and as long as its management isn't distracted by something more flashy than AI, one can reasonably expect the company to continue its lead in AI products and keep its unique economic moat intact.
Nvidia is 5th on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 193 hedge fund portfolios held NVDA at the end of the third quarter which was 179 in the previous quarter. While we acknowledge the potential of NVDA as a leading investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.