Meta's AI Chip Exploration Highlights NVIDIA's Growing Competitive Risks

What happened

A recent report revealed that Meta Platforms is exploring the use of AI chips from other major technology firms, potentially including Google, which could reduce its reliance on NVIDIA's hardware. This move aligns with NVIDIA's identified risks in its DeepValue report, where hyperscalers shifting to alternative accelerators pose a threat to its dominant market share. NVIDIA currently commands over 80% of the AI-training GPU market, but such diversification by a key customer like Meta signals a gradual erosion of its stronghold. While NVIDIA's CUDA software ecosystem and rapid architecture cadence provide a durable moat, any sustained shift could pressure its high-margin Compute & Networking segment. Investors must weigh this development against NVIDIA's premium valuation and the broader trend of hyperscalers seeking to control their AI infrastructure.

Implication

Meta's exploration of alternative AI chips underscores the tangible risk of hyperscalers diversifying their suppliers, which could lead to slower demand growth for NVIDIA's high-margin data center products. If this trend gains momentum, NVIDIA may face pricing pressure and market share loss, eroding its extraordinary 73.4% gross margins and challenging its projected 40% free cash flow CAGR. Investors should closely monitor quarterly Compute & Networking revenue and customer concentration, as any decline could trigger a valuation reset from the current ~44x P/E. This news reinforces the need for a defensive stance, given NVIDIA's stock trades ~30% above a conservative DCF estimate with limited margin of safety. Long-term, while NVIDIA's software moat and innovation cadence offer resilience, heightened competition necessitates vigilance on execution and customer retention to avoid underperformance.

Thesis delta

The DeepValue report's 'WAIT' stance, rooted in competitive risks and overvaluation, is strengthened by Meta's chip exploration, as it provides concrete evidence of hyperscaler diversification efforts. This does not invalidate NVIDIA's strong platform moat but increases the urgency for monitoring share dynamics and margin sustainability. Investors should now place greater emphasis on the competitive watch items, as any material shift by major customers could accelerate the thesis toward a 'POTENTIAL SELL' if growth expectations falter.