Nvidia Corp. (NASDAQ:NVDA) has been experiencing a period of exceptional growth, but potential challenges are looming that could impact its position as a leader in the AI market.

What Happened: Despite a record-breaking quarter, Nvidia, with a $2.5 trillion market cap, is facing potential threats that could undermine its dominant position in the AI sector, reported The Wall Street Journal. Rivals and major clients are developing chips to rival Nvidia's products, while the AI market is evolving in ways that could reduce the appeal of Nvidia's chips.

Startups are struggling to establish a business model that can justify the substantial investment in AI hardware, with only a fraction of the $50 billion industry investment in Nvidia's chips being recouped. Some AI startups using Nvidia's chips have faced internal turmoil, further complicating the landscape.

"I think their belief is very much like ours, that when you make things 100 times more efficient, you grow the market by much more than 100 times," Jared Quincy Davis, CEO of AI startup Foundry Technologies, told the WSJ.

"The better the economics of doing things with chips is, the bigger the markets will be," he added.

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Despite these challenges, Nvidia's sales have tripled in the latest quarter and are expected to double in the second quarter, driving the company's stock to record highs.

Among the companies designing or planning on making their own AI chips include Microsoft Corp., Alphabet Inc.'s Google, Meta Platforms Inc., and Amazon.com Inc.

Apple Inc., which has partnered with Nvidia for Vision Pro, is reportedly developing its own AI chips, too.

"It's on them to make sure that they can keep the moat wide, and right now I'd say they are doing a pretty good job," Stacy Rasgon, an analyst at Bernstein Research, told the WSJ.

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Nvidia CEO Jensen Huang outlined the company's strategy to expand beyond chip production into crafting data centers, which he sees as the modern digital factories of AI.

Why It Matters: Nvidia's AI dominance has been a significant factor in its recent success.

The company's Q1 results, released earlier this month, underscored the pivotal role of AI in its growth. The company's stock soared past $1,000 in after-hours trading following the Q1 beat, prompting analysts to predict that the "Nvidia party is turning into a rager."

Price Action: Nvidia's shares were up 7% in premarket trading on Thursday after closing at $949.50 on Wednesday, according to Benzinga Pro.

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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.

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