Nvidia‘s (NASDAQ: NVDA) the stock has rallied more than 600% over the past two years. Much of the rally was driven by the growth of the artificial intelligence (AI) market, which boosted sales of data center GPUs for processing complex AI tasks.
The market’s insatiable demand for data center chips continues to outstrip available supply, and analysts expect Nvidia’s revenue to increase at a compound annual growth rate (CAGR) of 45% from fiscal 2024 to fiscal 2027 (which ends in January 2027). They expect earnings per share (EPS) to rise at a CAGR of 51%.
So, even though Nvidia is already valued at more than $3 trillion, it still has a lot of room to open up. But before investors buy this high stock, they should pay attention to these four red flags that can suddenly end its historic rally.
1. It is an all-in play on AI chips
Back in fiscal 2022 (which ends in January 2022), Nvidia generated 46% of its revenue from gaming GPUs, 39% from data center GPUs, and the rest from professional visualization, automation, and OEM chips. However, the product mix completely changed over the next two years as sales of data center chips surpassed those of gaming chips.
In the first quarter of fiscal 2025, Nvidia generated 87% of its revenue from data center chips, 10% from gaming chips, and another 3% from other categories. It generated data center revenue of $22.6 billion in the first quarter compared to total revenue of nearly $27 billion for entire from fiscal 2023. This breakneck expansion transforms Nvidia from a more diversified GPU maker into an all-game in AI chip.
It’s okay if you believe Nvidia will continue to dominate the AI ​​market as it expands. But if the AI ​​market suddenly cools, Nvidia’s chip shortage could quickly turn into an oversupply. If the data center business exits, it cannot be withdrawn from the growth of the gaming segment and other small divisions to reduce the comparison of these years.
2. Facing unpredictable regulatory challenges
Nvidia’s heavy reliance on the AI ​​market presents many unpredictable regulatory challenges. U.S. regulators have repeatedly clamped down on exports of AI chip shipments to China, and that pressure could prompt Chinese chipmakers to accelerate their own AI chip development.
Tighter regulation of generative AI technology, already in place in Europe, could slow the industry’s overheated growth and push companies to buy new AI chips. Complaints about mass plagiarism and other ethical issues could also force AI companies to develop slower and faster.
3. Facing a clear competitive threat
Nvidia controls 88% of the discrete GPU market, according to JPR, but is the top competitor AMD has launched a cheaper AI accelerator. AMD’s MI300 Instinct GPUs have 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 the new Gaudi 3 AI accelerator that is faster and more power efficient than H100 GPUs Nvidia.
District Super Micro Computer, which has grown rapidly over the past few years by producing dedicated AI servers powered by Nvidia chips, has also developed new servers optimized for lower-cost AMD and Intel AI accelerators. These cheaper servers could attract cost-conscious data center operators and erode Nvidia’s market share.
Meanwhile, Nvidia’s low supply and high prices keep its top customers — including OpenAI, Microsoft, Alphabet‘s Google, and Amazon — to develop its own first-party AI accelerator. The chip won’t threaten Nvidia’s short-term growth, but it could loosen its iron grip on the hyperscale data center market.
4. Insiders are net sellers
Nvidia stock isn’t cheap at 49 times forward earnings and 26 times this year’s sales. But if it has the potential to double or triple again in the near term, the price will look reasonable and insiders should get more shares.
But over the past 12 months, Nvidia insiders have sold more than 4 times the shares they bought. Over the past three months, they sold more than 52 times the shares they bought. The insider selling doesn’t mean the stock is falling off a cliff, but it’s a troubling trend that suggests short-term gains are limited.
Is it still safe to buy Nvidia stock?
I believe Nvidia is still worth buying, but investors should not assume it is a perfect growth stock. The transformation from gaming company to AI is sudden, and could cause significant pain over the next few years. But if it manages to overcome all the competitive, regulatory, and macro challenges, it should remain one of the easiest ways to profit from the expansion of the secular AI market.
Should you invest $1,000 in Nvidia right now?
Before buying shares in Nvidia, consider this:
At Motley Fool Stock Advisor The team of analysts only recognized what they believed it to be 10 best stocks to buy investors now… and Nvidia is not one of them. 10 stocks that made the cut could produce monster returns in the coming years.
Try when Nvidia created this list on April 15, 2005… if you invest $1,000 when you recommend, you will have $757,001!*
Stock Advisor gives investors an easy-to-follow blueprint for success, including portfolio-building guidance, regular updates from analysts, and two new stock picks every month. At Stock Advisor service already more than four return of the S&P 500 since 2002*.
View 10 stocks »
* The Stock Advisor returns on 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 a position in Amazon. The Motley Fool has positions and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nvidia is the Top AI Stock, but Don’t Ignore These 4 Red Flags was originally published by The Motley Fool
