When it comes to making artificial intelligence (AI) fleas, Nvidia (NVDA 0.80%) has a big lead over the competition. By most estimates, the company has an 80-95% market share for AI graphics processing units (GPU).

However, with the company’s stock trading at 36 times sales, Nvidia’s stock price will be very sensitive to competitive pressures. And according to one indicator, these competitive pressures could arrive sooner than expected.

Nvidia may be underinvesting in this key area

When it comes to avant-garde AI Actions Like Nvidia, tracking research and development (R&D) spending is essential. Research and development spending helps investors gauge how much a company is investing in innovation. Often, these expenses won’t pay off for years, but ignoring this critical area of ​​investment can prevent a company from maintaining its competitive advantages over the long term.

Right now, there’s no doubt that Nvidia has a huge competitive advantage when it comes to AI GPUs. The company generates gross margins of around 75%, while its competitors, including Intel And AMDonly manage gross margins of between 40 and 50%, a strong sign of Nvidia’s pricing power.

Nvidia also does not negotiate higher prices for lower volumes. Almost all market estimates give the company a majority market share for AI GPUs.

There’s just one problem: Nvidia appears to be underinvesting in research and development just as its lead in AI GPUs is growing to dominant proportions. Intel spends billions more each year on research and development, despite having a 95% lower market capitalization. Even AMD has higher research and development expenses as a percentage of revenue.

I fear Nvidia is sacrificing future growth by not spending more research and development.

R&D NVDA/Revenue (TTM) data by Y charts.

How to Invest in AI Stocks Like Nvidia

Here’s the basic truth about investing in chip stocks like Nvidia: this industry is very cyclic. In 2022, the valuations of almost every chipmaker – including Nvidia – fell by double digits, even as volumes continued to increase over the long term. Then, in 2023, the sector’s valuation skyrocketed across the board.

However, in 2024, something interesting happened. Nvidia’s stock price continued to soar, while AMD’s valuation remained stable and Intel even lost about a third of its value.

The last few years have not been atypical. Each year in the semiconductor space brings new challenges and opportunities, with valuations and market shares evolving significantly with new innovations and growth categories. But there is no doubt what the biggest driver of growth will be over the next decade or more: AI.

Right now, Nvidia GPUs are the go-to option for almost every AI developer, so much so that companies are willing to pay significantly more for Nvidia chips than competing options. This is great news for Nvidia, given that volumes and pricing power are increasing just as spending on AI infrastructure takes off.

But as in previous chip wars, competition is increasing. Intel is investing billions in its Gaudi 3 and Falcon Shores chips, which recently showed performance comparable to Nvidia’s H100 models. And AMD’s MI325X chip, launching later this year, can handle most of the AI ​​applications being developed today. Meanwhile, a multitude of private start-ups, such as Cerebral and SambaNova, are taking unique approaches to GPU AI that could eventually make Nvidia’s current approach obsolete.

While Nvidia’s lead and pricing power won’t disappear overnight, growing competitive pressures – and competitors’ R&D spending – lead me to a simple investment strategy: Don’t put all your eggs in one basket. Most investors betting on Nvidia today are betting on increased AI spending, not necessarily on Nvidia’s long-term ability to maintain its competitive advantages.

If that includes you, don’t be afraid to allocate some of your capital to out-of-favor chip stocks, like Intel and AMD, that are spending billions to support future launches that could still be years away. Even if 90% of your AI investment is focused on Nvidia, diversifying your portfolio into other chipmakers ensures that no matter where the competitive tide turns, you’ll be able to take advantage of the growing demand for AI. AI, one of the biggest growth opportunities. far this century.