Back in 2017, Nvidia co-founder and CEO Jensen Huang made a bold statement in an interview with the MIT Technology Review, declaring that “AI is going to eat software.” Fast forward to today, and Nvidia briefly claimed the title of the most valuable company in the world, with a market cap exceeding $3.3 trillion, before settling just behind tech giants Microsoft and Apple. The AI revolution has undeniably catapulted Nvidia into the financial stratosphere, showering its investors with extraordinary gains.

Nvidia stands tall as an AI juggernaut, having pioneered hardware and software for AI long before it became mainstream. Huang’s foresight put Nvidia ahead of the curve, well-prepared for the AI boom when the time came.

The turning point arrived with the introduction of OpenAI’s ChatGPT in late 2022. Generative AI technologies captured the collective imagination, compelling businesses to act swiftly to avoid falling behind.

The surge in Nvidia’s revenue, net income, and stock price following the ChatGPT launch is nothing short of astronomical.

Data by YCharts.

Nvidia boasted an exceptional net income margin of 57% in the first quarter of its fiscal 2025 ending in April. This figure is unparalleled, especially for a company predominantly dealing in semiconductor hardware sales.

Nvidia’s competitive edge is unmatched, granting it formidable pricing power. Customers are willing to pay a premium for its chips to maintain their competitive standing in the AI race.

Assessing the Durability of Nvidia’s Advantage

A competitive advantage can boost profitability, but without a lasting competitive moat, its benefits may prove fleeting. Nvidia appears to possess something special with its GPUs essential for AI model training and execution. Major players like Meta Platforms and Microsoft stand as Nvidia’s key clients, driving a significant portion of its revenue. The immense backing from these tech titans speaks volumes about the unparalleled performance and quality of Nvidia’s products.

On the flip side, Nvidia’s current pricing power may be more a byproduct of supply-demand dynamics than product excellence. While Nvidia leads the pack as a first mover, the deep-pocketed tech giants are developing their alternatives.

Investors face critical questions – Will the demand for AI hardware and software continue to surge? Can Nvidia sustain its dominant market stance amidst evolving competition?

If demand wanes or rivals encroach on its market share, Nvidia might see a dip in its pricing power. It won’t fade into obscurity, but those lofty profit margins could normalize.

The Role of Software in Nvidia’s Dominance

Nvidia derives a substantial portion of its revenue from hardware, while its revenue breakdown focuses on end markets rather than sources. The strategic emphasis on software could be a hidden driver of Nvidia’s success.

One of Nvidia’s key offerings is CUDA (Compute Unified Device Architecture), a software language embraced by 4.7 million developers in 2023. CUDA maximizes the potential of Nvidia’s GPUs, making it indispensable for machine learning and data analysis tasks. Favoring Nvidia’s software ecosystem could anchor persisting demand for its products, bolstered by the familiarity developers have with its frameworks.

By combining software prowess with top-tier GPU performance, Nvidia has orchestrated a masterclass in leveraging AI supremacy to emerge as a global colossus.

As long as this narrative holds, Nvidia’s stock is poised for sustained outperformance. If this trend solidifies, Nvidia’s advantage could transform into an impregnable moat. Conversely, if its dominance proves transient, current investors could face a jolting return to reality.

Therefore, Nvidia’s current and prospective shareholders must formulate a verdict on the sustainability of its standing.