Nvidia Will Be the next Intel, Why I'm bearish long term. TSMC is the true winner(assuming China doesn't invade)

Right now, Google, Microsoft, Apple, Amazon, and Meta are all spending more than Nvidia on R&D and are developing their own AI chips. Tesla, and AMD are also developing AI chips. Right now, tech companies are only buying Nvidia's chips to get started and build market share, because they do not want to fall behind their competition.

Using Nvidia's chips at current prices is not profitable, even successful AI companies such as OpenAI fail to achieve positive operating margins despite a highly popular product with paid features. Large tech companies are reluctantly buying Nvidia's hardware to avoid falling behind their competition in market share. But relying on Nvidia long term is never the intention, these companies need to be profitable eventually, Nvidia is just there to get them started.

The thing is, Nvidia's 74.56% gross margin is a strength, but its also a vulnerability. It demonstrates that any AI company that can cut out Nvidia can significantly reduce their costs, and that's why everyone is building their own chips. They don't need to be faster than Nvidia to succeed, they just need to be fast enough to provide services at a lower cost, which is quite a low bar. Developing new products takes time, which is why Nvidia's windfall has lasted. But give it 1-3 more years and you'll start to see the impact on Nvidia's sales.

With everyone rushing to develop their own chips, and all of them relying on TSMC, TSMC has the true windfall. They will certainly be able to hike their prices on wafers due to increased demand, which will hurt Nvidia's margins.

Intel was once a dominant and unstoppable player in the semiconductor space, but then they got too comfortable and started spending their cash flow on dividends and stock buybacks instead of reinvesting in R&D. We see how that played out, with AMD catching up and stealing market share, and now Intel is struggling. No moat is impenetrable.

Nvidia is following in Intel's footsteps with their $50 Billion stock buyback plan at 50x earnings. Despite facing competition from the largest tech companies with deep pockets, they are spending their record windfall just to buy back less than 2% of their shares outstanding. This will be their downfall. They are not hedging their reliance on TSMC by seeking to acquire or develop their own fab business, they are not increasing R&D sufficiently to stay ahead of their competition. This will be their downfall.

In 5-10 years, Nvidia will almost certainly have thinner margins and less market share in the AI space as their customers develop their own in-house solutions. At best, Nvidia will be relied upon for niche applications where performance is essential.