Recent comments made by two of Nvidia's biggest customers could be viewed as yellow flags.
In the late 19th century, coal miners began bringing canaries when they descended into the mines. If the canary became distressed or died, it was an early warning sign that dangerous levels of carbon monoxide were present.
Investors today don't have anything as simple to use in detecting problems for companies as canaries in the coal mine. However, paying close attention to comments made in the quarterly earnings calls of companies' peers, customers, and suppliers can sometimes provide important hints about potential issues.
That brings me to Nvidia (NVDA 0.48%). The chipmaker won't announce its quarterly results until Nov. 20, 2024. But two of the company's biggest customers revealed information about their businesses last week after releasing their earnings results. Should Nvidia investors worry about Amazon's (AMZN -1.09%) and Microsoft's(MSFT -0.47%) latest updates?
Amazon Web Services (AWS) remains the biggest cloud services provider in the world with a market share of 31%. Unsurprisingly, it's one of the largest customers for Nvidia's graphics processing units (GPUs).
In Amazon's third-quarter earnings call on Thursday, CEO Andy Jassy acknowledged his company's "deep partnership with Nvidia." However, he immediately added that AWS customers "want better price performance on their AI workloads."
As a result, AWS has developed its own chips for AI training and inference. Jassy said, "We're seeing significant interest in these chips, and we've gone back to our manufacturing partners multiple times to produce much more than we'd originally planned."
Microsoft is the world's second-largest cloud services provider with a market share of 20%. The tech giant announced its fiscal 2025 first-quarter results last Wednesday. In Microsoft's Q1 call, CEO Satya Nadella mentioned the company was experiencing "demand issues" related to its ability to keep up with demand due to "external third-party stuff that we leased moving out."
CFO Amy Hood provided more clarification on Nadella's remarks. She said that third parties were "delivering later than we had expected." The resulting AI supply constraints negatively impacted Microsoft's guidance, causing a deceleration of between one and two points. These comments seem to refer to Nvidia's delays in shipping its new Blackwell GPUs.
At least at first glance, Amazon's and Microsoft's quarterly updates won't give Nvidia investors a warm and fuzzy feeling. Cloud customers find Nvidia's chips so expensive that they want cheaper alternatives so much that Amazon has ramped up production of its own chips multiple times. Nvidia's Blackwell delays seem to be weighing on Microsoft's guidance. This doesn't sound great for Nvidia. But there's more to the story.
Jassy said in Amazon's Q3 call that AWS has "more demand that we could fulfill if we had even more capacity today." He doesn't think this problem is limited to AWS, either. The primary constraint is chips. That should bode well for Nvidia.
Indeed, Jassy pointed out that Amazon is usually Nvidia's "lead partner on most of their new chips." He added, "And I expect us to have a partnership for a very long time that matters." That doesn't sound like Nvidia has much to worry about with Amazon's alternative chips.
Microsoft's Nadella also highlighted his company's relationship with Nvidia in his comments last week. He bragged that Microsoft is "the first cloud to bring up Nvidia's Blackwell system with GB200-powered AI servers."
Hood echoed Jassy, stating, "Demand continues to be higher than our available capacity." She also said that Microsoft is confident that it will see accelerated growth in the second half of fiscal 2025 as its supply of AI chips improves.
I don't think Nvidia investors have anything to worry about from Amazon's and Microsoft's latest updates. But does that mean there are no worries at all? I wouldn't go that far.
Nvidia may report tremendous growth in its Q3 update in a few weeks yet still fail to meet Wall Street's estimates. It's important to remember we're talking about a stock that trades at a trailing price-to-earnings ratio of 63.5. Nvidia's lofty market cap of $3.3 trillion reflects sky-high growth expectations. Any hiccup could cause the stock to sink.
That said, I heard nothing in Amazon's and Microsoft's quarterly updates that give reason for concern about Nvidia's prospects over the next few years. Blackwell should be a massive commercial success. If there is a canary in the coal mine for Nvidia, it's probably chirping happily.