Nvidia‘s (NASDAQ: NVDA) The company’s stock has gained more than 600% over the past two years. Much of that gain has come from growth in the artificial intelligence (AI) market, which has boosted its sales of data center GPUs for processing complex AI tasks.
The market’s insatiable demand for its data center chips continues to outstrip available supply, and analysts expect Nvidia’s revenue to grow at a compound annual growth rate (CAGR) of 45% from fiscal 2024 to fiscal 2027 (which ends in January 2027). They expect its earnings per share (EPS) to grow at a CAGR of 51%.
Even though Nvidia is already worth more than $3 trillion, it could still have plenty of room to grow. But before buying this booming stock, investors should pay attention to these four warning signs that could bring its historic rise to an unexpected halt.
1. AI chips have become a game in themselves
In fiscal 2022 (which ended in January 2022), Nvidia generated 46% of its revenue from its gaming GPUs, 39% from its data center GPUs, and the rest from its professional visualization, automotive, and OEM chips. However, that product mix changed completely over the next two years, as its data center chip sales eclipsed its gaming chips.
In the first quarter of fiscal 2025, Nvidia generated 87% of its revenue from data center chips, 10% from gaming chips, and the remaining 3% from its other categories. It generated $22.6 billion in data center revenue in that quarter alone, compared with total revenue of nearly $27 billion in the prior year. all This meteoric expansion has transformed Nvidia from a more diversified GPU maker into a full-fledged player in AI chips.
That’s a good thing if you think Nvidia will continue to dominate the AI market as it expands. But if the AI market cools off abruptly, Nvidia’s chip shortage could quickly turn into a supply glut. If its data center business slows, the company won’t be able to count on growth in its gaming segment and other smaller divisions to smooth out those year-over-year comparisons.
2. It faces unpredictable regulatory challenges
Nvidia’s overwhelming reliance on the AI market exposes it to a host of unpredictable regulatory challenges. U.S. regulators have repeatedly tightened restrictions on AI chip exports to China, and that pressure could prompt Chinese chipmakers to accelerate development of their own AI chips.
Tighter regulations on generative AI technologies, already in place in Europe, could slow the growth of the booming sector and prompt companies to limit their purchases of new AI chips. Complaints about mass plagiarism and other ethical issues could also force AI companies to grow at a slower, more measured pace.
3. It faces clear competitive threats
Nvidia controls 88% of the discrete GPU market, according to JPR, but its main rival AMD AMD has launched cheaper AI accelerators. AMD’s MI300 Instinct GPUs have already beaten Nvidia’s H100 GPUs – which cost about four times as much – in terms of raw processing power and memory usage in several industry benchmarks. Intel also recently claimed that its new Gaudi 3 AI accelerators are faster and more power-efficient than Nvidia’s H100 GPUs.
Super microcomputerwhich has grown rapidly in recent years by producing AI-focused servers powered by Nvidia chips, has also developed new servers optimized for cheaper AI accelerators from AMD and Intel. Those cheaper servers could appeal to cost-conscious data center operators and erode Nvidia’s market share.
Meanwhile, Nvidia’s tight supply and high prices are pushing its major customers, including OpenAI, Microsoft, AlphabetGoogle, and Amazon — to develop their own proprietary AI accelerators. These chips won’t threaten Nvidia’s near-term growth, but they could gradually loosen its grip on the hyperscale data center market.
4. Its insiders are net sellers
Nvidia stock isn’t cheap, trading at 49 times forward earnings and 26 times this year’s sales. But if it had the potential to double or triple again in the near term, its valuations would look reasonable, and its insiders should be buying up more shares.
Yet over the past 12 months, Nvidia insiders have sold more than 4 times as many shares as they have bought. Over the past three months, they have sold more than 52 times as many shares as they have bought. These insider sales don’t necessarily mean the stock is about to crash, but it is a worrying trend that suggests its near-term upside potential is limited.
Is it still safe to buy Nvidia stock?
I think Nvidia is still worth buying, but investors shouldn’t assume it’s a perfect growth stock. Its transformation from a video game company to an AI company has been brutal, and it could face significant growing pains in the coming years. But assuming it overcomes all of these competitive, regulatory, and macroeconomic challenges, it should remain one of the easiest ways to profit from the secular expansion of the AI market.
Should You Invest $1,000 in Nvidia Right Now?
Before you buy Nvidia stock, consider this:
THE Motley Fool, Securities Advisor The team of analysts has just identified what they believe to be the 10 best stocks Investors Should Buy Now…and Nvidia Wasn’t One of Them. These 10 Stocks Could Deliver Monstrous Returns in the Years to Come.
Consider when Nvidia I made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $757,001!*
Securities Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building advice, regular analyst updates and two new stock picks each month. Securities Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.
See all 10 actions »
*Stock Advisor returns as of June 24, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long Intel January 2025 $45 calls, long Microsoft January 2026 $395 calls, short Intel August 2024 $35 calls, and short Microsoft January 2026 $405 calls. The Motley Fool has a disclosure policy.
Nvidia Is A Top AI Stock, But Don’t Ignore These 4 Red Flags was originally published by The Motley Fool
