Two names that always dominate the headlines are Elon Musk and Nvidia (NASDAQ:NVDA). While both names often get noticed, it’s very rare to see Musk and Nvidia in the same sentence.
But on December 2nd, a DigiTimes report suggested that Musk’s artificial intelligence (AI) startup xAI had signed a major deal with Nvidia.
Below, we’ll break down what’s been reported so far and assess how xAI’s partnership with Nvidia could be a big catalyst for the semiconductor world’s darling.
What did Mr. Musk do now?
Perhaps the most exciting piece of infrastructure for generative AI development is the graphics processing unit (GPU). GPUs are chipsets that can run highly advanced algorithms at lightning speeds around the clock.
According to industry estimates, Nvidia holds 88% of the GPU market and completely dominates the space. With such scale, it’s no surprise that many of the world’s biggest companies use Nvidia’s GPUs, including Microsoft, Amazon, Alphabet, Meta Platforms, and Musk’s electric car company Tesla.
According to DigiTimes, Musk was involved in a deal between xAI and Nvidia, and reportedly personally contacted Nvidia CEO Jensen Huang to buy a cluster of 1 billion GB200 GPUs. He is said to have offered more than $10,000.
Why is this deal so important?
As it relates specifically to xAI, let’s take a look at what Musk posted on X (formerly Twitter) in September.
xAI is already working with Nvidia, specifically on building a supercomputer called Colossus. Additionally, Musk has dropped some breadcrumbs that suggest xAI will power AI infrastructure sooner rather than later.
I think Nvidia has a great chance to continue working with xAI, considering xAI already ignored Oracle earlier this year. This is highlighted by the new GB200 contract.
Wedbush Securities’ Dan Ives is one of Wall Street’s most respected technology analysts. Ives recently wrote on social media that he expects more than $1 trillion to be spent on AI infrastructure over the next three years.
Given Nvidia’s existing footprint in the AI infrastructure space, there’s an argument that the company will capture much of this incremental capital expenditure (capex). But that may not be the case in the long run.
Read more: Demand for Nvidia’s AI chips remains strong, but slowing sales growth worries investors
Is Nvidia stock a buy?
Despite its first-mover advantage in the GPU space, the combination of direct competition with Advanced Micro Devices and internal competition with its own customers makes me wonder how much faster Nvidia can actually accelerate its growth.
As I’ve said before, I see Nvidia continuing to be a major pillar of the broader AI story for years to come. But Nvidia’s ability to compete will be difficult once alternative GPUs, perhaps at lower prices, come to market. In other words, GPUs will become relatively commoditized and at some point will be in the hands of Nvidia. Simply put, a multibillion-dollar deal with the world’s most attractive AI business is a luxury, not the norm forever.
Ultimately, I think Musk’s choice to use Nvidia products for xAI’s computing infrastructure speaks volumes about the quality of the company’s GPUs. I’m encouraged by the relationship between xAI and Nvidia, but this deal alone doesn’t make this stock a buy. With increased investment in AI infrastructure, Nvidia is well-positioned to gain further market share, but I remain cautious about the company’s long-term prospects.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Adam Spatacco has held positions at Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Oracle, and Tesla. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
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