Does Nvidia have a lasting competitive advantage or is it just a temporary competitive advantage?
May 2017, NVIDIA (NVDA -3.22%) Co-founder and CEO Jensen Huang was interviewed. MIT Technology Review He said, “Software is eating the world, but AI will eat software.” This week, Nvidia's market cap surpassed $3.3 trillion, briefly making it the world's most valuable company, after closing Friday at just $100 billion. Microsoft and appleIn short, the artificial intelligence (AI) revolution has delivered incredible financial results for companies and generated incredible gains in stock prices.
Nvidia is undoubtedly a giant in AI, and Huang was ahead of the trend, developing both the hardware and software for AI long before there was a demand for it. In other words, Nvidia was ready for AI long before it was in the spotlight.
With OpenAI releasing its ChatGPT product in late 2022, that time has finally come: generative AI applications have suddenly come to the forefront of everyone's imagination, and companies felt they had to do something soon or risk being left behind.
The chart below shows that since the launch of ChatGPT, Nvidia's revenue and net profit have skyrocketed, not to mention its stock price.
Data by YCharts.
Just to highlight the key takeaway here, Nvidia had a net profit margin of 57% for the first quarter of fiscal 2025 (ended April), which is astronomical for any company in any industry, let alone one that makes significant revenue from selling semiconductor hardware.
The chart below further shows just how profitable Nvidia is (in green).
So it's clear that Nvidia has a competitive advantage and pricing power: Customers are willing to pay exorbitant prices because they have to get their hands on the company's chips to survive in the AI race.
With this in mind, here are some things investors should consider.
Are the benefits permanent?
There's a difference between a competitive advantage and a competitive moat. When a company has an advantage, it can make more money than its competitors. But if it doesn't also have a moat, that advantage may not last.
Nvidia, on the other hand, seems to have something special: its graphics processing units (GPUs) are essential for powering and training AI models. Meta Platform and Microsoft is NVIDIA's largest customer. While NVIDIA won't directly acknowledge that they are its largest customer, its top two customers accounted for 13% and 11%, respectively, of its $26 billion in first-quarter revenue.
These are some of the most important technology companies in the world, and if you're spending this much money on NVIDIA products, you can be sure they're high performance and high quality.
Meanwhile, Nvidia's current pricing power may have more to do with supply and demand than with the quality of its product — after all, Nvidia was a pioneer in the field and was able to supply better GPUs than most other companies as demand soared — but big tech companies have deep pockets and are developing their own solutions.
So investors need to answer two questions: First, will demand for AI hardware and software continue to grow, and second, can Nvidia maintain its dominant position in the industry?
If overall demand falls or other companies take market share, Nvidia could lose some of its precious pricing power. It won't become irrelevant, but its astronomical profit margins could normalize.
So maybe the secret here is the software?
As mentioned above, Nvidia generates significant revenue from hardware, though the exact figures are unclear and management breaks down revenue by end market rather than by source, but the company has also strategically prioritized software, which could be driving its results behind the scenes.
For example, Nvidia offers a software language called CUDA (Compute Unified Device Architecture), which was used by 4.7 million developers in 2023. This software framework unlocks the true power of Nvidia's GPUs. If a company is using Nvidia hardware and wants to perform tasks such as machine learning or data mining, they often need CUDA to do that work.
This could motivate people to choose Nvidia GPUs over similar products from competitors. If developers are used to Nvidia's software products and frameworks, they may be reluctant to switch and learn a new system. This could support continued demand for Nvidia, as it is an ecosystem that many developers are familiar with.
Combine this dominance in software and services with top-tier GPU performance, and it becomes easier to see how Nvidia has leveraged its leadership in AI to become the world's most valuable company.
As long as this remains the case, Nvidia's stock should continue to outperform. And the longer this remains true, the more likely its advantage is in fact a bulwark. But if its current advantage is only temporary, to the surprise of many investors today, the company's profits could stagnate again. This is why it is so important for Nvidia shareholders and potential investors to form an opinion on this matter.
Randi Zuckerberg, former director of market development and communications at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
