“I have been up against tough competition all my life. I wouldn’t know how to get along without it.” — Walt Disney
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Good morning!
Enthusiasts of Italian supercars surely know how Lamborghini allegedly came to be. Apocryphally, Ferruccio Lamborghini, sports-car enthusiast and tractor-manufacturing tycoon, visited Enzo Ferrari complaining about the clutch on his Ferrari automobile repeatedly breaking, at which point Signor Ferrari dismissed him, telling him to “stick to making tractors.” (Some versions of the story assert that Enzo further insulted Ferruccio by suggesting that rather than the clutch, the real problem was Ferruccio’s incompetent driving.) Angered, Lamborghini decided instead to try to beat Ferrari at his own game, ultimately creating Ferrari’s chief rival in 1963.
This oft-repeated story (which likely indulges in a little dramatic license) features a not-uncommon theme: many dominant companies have later found themselves losing revenues to deep-pocketed former customers who decided to go in-house – and sometimes even become competitors. Nvidia, which reported that just four major customers accounted for nearly half of its $130.5 billion in revenues in fiscal-year 2025 (which ended Jan. 26), has been faced with the possibility for some time. After all, any customer who can afford to spend an average $16.3 billion a year on AI chips (half of $130.5 billion divided by four) probably counts as being deep-pocketed.
Nvidia did not name those four major customers, but likely suspects have included big tech companies like Microsoft, Alphabet, Meta, and Amazon. Each of those has announced efforts to develop their own AI chips, though admittedly none seem to be a major threat as of this writing.
Now another customer is openly joining the fray. Broadcom (AVGO -2.31% ) shares surged 9.4% last Friday after it was widely reported that OpenAI had struck a $10 billion deal with Broadcom to develop and produce its own AI chip sometime next year. (Broadcom disclosed the existence of the deal but did not identify the counterparty. Broadcom believes its customized AI chips can offer performance advantages over Nvidia’s more generalized AI chips.
Although increased investor enthusiasm for Broadcom is understandable (AVGO -2.31% rose another 3.2% yesterday), perhaps just as interesting is further evidence of major Nvidia customers seeking alternatives. That supports the argument that AI demand remains strong, so much so that customers do not want to wait for Nvidia’s efforts to expand production (including in the U.S.) to bear fruit.
But what does this mean for Nvidia?
We’ve seen companies confronted with customers becoming competitors (or moving capabilities in-house) before. Often, they’ve continued to thrive. Netflix was once a major customer of Hollywood studios, leasing their content for streaming — until the company in 2011 started producing its own original content (beginning with House of Cards, which debuted in 2013). Yet the shares of studios like Disney, Paramount, and Warner Brothers largely continued their uptrend in the years immediately following. Similarly, Netflix was once the largest customer of the content delivery manager Akamai, and though Akamai shares plunged briefly when it was announced that the streaming giant would move to an in-house solution, AKAM -0.65% shares ultimately continued their upward trajectory as well.
So although it might be momentarily alarming when major, deep-pocketed customers like Netflix, Microsoft, Amazon, and Google (and like Ferruccio Lamborghini) start developing in-house replacements for a company’s products and services, longer-term investors do not necessarily need to panic.
After all, Lambos might well have their die-hard fans, but all these years later, Ferrari remains the larger company.
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📧✍️Here’s what a reader commented📧✍️
Question: Do you think the court’s ruling on Google’s search monopoly was too harsh, overly lenient, or just right?
Answer: Just right on the ruling. Judge Mehta correctly considered the changing environment of queries and search with the emergence of AI competitors. It’s a competitive environment and while Alphabet keeps its historic Crown Jewels, their luster is fading via new competition in its historic market.
Catch up with FS Insight
We are surprised to see AAII net bulls still negative, with bears outnumbering bull for five consecutive weeks. Generally, this is constructive for stocks near term.
Technical
The S&P 500 managed to finish higher yesterday despite some weakness in groups like utilities, which have been hit hard in recent weeks. Technology and software have come back in recent days, but they need to do a little more for me to have confidence that they are officially in the clear.
Crypto
Short-term downside risks are building in the crypto market as (1) liquidity conditions deteriorate, (2) negative seasonality persists, and (3) the market debates the potential for a “Fed mistake”.
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| Date | Time | Description | Estimate | Last |
|---|---|---|---|---|
| 9/9 | 6AM | Aug Small Biz Optimisum | 100.5 | 100.3 |
| 9/10 | 8:30AM | Aug PPI m/m | 0.3 | 0.9 |
| 9/10 | 8:30AM | Aug Core PPI m/m | 0.3 | 0.9 |
| 9/11 | 8:30AM | Aug CPI m/m | 0.3 | 0.2 |
| 9/11 | 8:30AM | Aug Core CPI m/m | 0.3 | 0.3 |
| 9/11 | 8:30AM | Aug CPI y/y | 2.9 | 2.7 |
| 9/11 | 8:30AM | Aug Core CPI y/y | 3.1 | 3.1 |
| 9/12 | 10AM | Sep P UMich 1yr Inf Exp | 4.6 | 4.8 |
| 9/12 | 10AM | Sep P UMich Sentiment | 58.0 | 58.2 |
