When it comes to manufacturing artificial intelligence (AI) chips, Nvidia (NVDA 0.80%) has a big head start on the competition. According to most estimates, the company has an 80% to 95% market share for AI graphics processing units (GPUs).

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

Nvidia may be underspending in this key area

When it comes to the latest generation AI actions like Nvidia, monitoring research and development (R&D) spending is a must. R&D spending helps investors gauge how much a company invests in innovation. Often, these expenditures will not pay off for years, but ignoring this critical area of ​​investment can prevent a business from maintaining its competitive advantages over the long term.

At this point, there’s no doubt that Nvidia has a huge competitive advantage when it comes to AI GPUs. The company generates gross margins of approximately 75%, while competitors, incl Intel and AMDit only manages gross margins between 40% and 50% — a strong sign of Nvidia’s pricing power.

Nvidia isn’t trading higher prices for lower volumes either. Almost every market estimate pegs the company with a controlling market share for AI GPUs.

There’s just one problem: Nvidia seems to be underinvesting in research and development, while its lead in AI GPUs grows to dominant proportions. Intel spends billions more per year on R&D despite having a 95% smaller market cap. Even AMD has higher R&D spending as a percentage of its revenue.

I’m concerned that Nvidia is sacrificing future growth by not spending more on research and development.

NVDA R&D to Revenue (TTM) given by YCharts.

How to invest in AI stocks like Nvidia

Here is the basic truth of investing in chip stocks as Nvidia: This industry is very cyclic. In 2022, valuations for almost all chipmakers — including Nvidia — fell by double digits, even as volumes continued to grow over the long term. Then, in 2023, the valuation of the industry increased across the board.

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

The last few years are not atypical. Each year in the semiconductor space brings new challenges and opportunities, with valuations and market shares changing dramatically with new innovations and growth categories. But there’s no doubt what will be the biggest driver of growth 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 as it faces growing volumes and increasing pricing power just as AI infrastructure spending is taking off.

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

While Nvidia’s power and pricing power won’t disappear overnight, growing competitive pressures — and rivals’ R&D spending — lead me to a simple investment strategy: Don’t put all your eggs in one single 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 edge.

If that includes you, don’t be afraid to allocate some of your capital to out-of-favor chip stocks like Intel and AMD, which are spending billions to support future releases that could still be years away. Even if 90% of your AI investment is focused on Nvidia, diversifying your portfolio with other chipmakers ensures that no matter where the competitive winds shift, you’ll be in a position to take advantage of rising AI demand , one of the biggest growth opportunities so far this century.