Nvidia (NVDA 2.98%) stock is pulling back in Tuesday’s trading as investors react to some big news in the tech sector. The artificial intelligence (AI) hardware leader’s share price was down 4.3% as of 2:30 p.m. ET and had been down as much as 7.1% earlier in the session.

According to a new report from The Information, Meta Platforms is lining up to purchase Alphabet’s tensor processing units (TPUs). Should Nvidia investors be worried?

Image source: Nvidia.

Is Alphabet on the verge of disrupting Nvidia’s AI dominance?

Thus far, Nvidia’s graphics processing units (GPUs) have been the go-to hardware for training and running advanced AI models. The competitive edge provided by the company’s high-end processors has allowed the business to command stellar pricing power and deliver a run of record-breaking earnings growth.

Of course, other tech giants have also been eager to reduce their reliance on Nvidia’s technology. Cloud hyperscalers including Alphabet, Microsoft, Meta Platforms, and Amazon have all been working on designing their own processors capable of handling workloads currently dominated by Nvidia’s GPUs.

Executives at Alphabet’s Google Cloud division have reportedly estimated that expanding direct sales of its TPUs to third-party customers could allow the company to capture roughly 10% of Nvidia’s annual revenue. If Alphabet’s TPUs could take market share away from Nvidia at that level, there’s also a good chance that shifting competitive dynamics would put significant pressure on the GPU leader’s gross margins.

Nvidia

Today’s Change

(-2.98%) $-5.45

Current Price

$177.10

Nvidia’s business has historically been subject to cyclical trends, but soaring demand for processors used to power AI data centers has resulted in incredible growth over the last five years. The performance advantages offered by Nvidia’s processors have also allowed the company to defy gravity when it comes to margins, but hardware businesses tend to face rising competition and commoditization trends over time.

For reference, Nvidia posted a gross margin of 73.4% last quarter. That level was down from the gross margin of 74.6% recorded in the prior-year period, but it still represents a fantastic margin for a hardware-focused business. While it was already broadly known that cloud giants are working on their own AI processors, reports suggesting that Meta Platforms intends to buy Alphabet’s TPUs could signal that alternatives to Nvidia’s tech will be ready for prime time sooner than investors had anticipated.

Adoption of Alphabet’s TPUs doesn’t mean that Meta Platforms and other customers will completely ditch Nvidia’s processors at rapid speed. Instead, cloud giants will likely aim to shift some of their processing needs to internally developed chips and other processors capable of delivering more cost-effective performance.

Right now, growth in the AI processing space is robust enough to support multiple winners. Even so, the rise of custom chips and processing alternatives developed by some of Nvidia’s biggest customers poses a significant risk to the company’s growth story.