Shares of Nvidia have soared almost 800% over the last two years, but can the company keep its growth up?
Over the last two years, the prospects of artificial intelligence (AI) have become a bellwether for the technology industry. Among a long list of AI investment opportunities, semiconductor companies have emerged as some of the most lucrative.
Since ChatGPT took the world by storm in November 2022, shares of Nvidia (NVDA -1.92%) have gained a jaw-dropping 760% as of this writing. In fact, the company’s market cap briefly eclipsed $3 trillion.
It really wasn’t too long ago that Nvidia was seen as a niche opportunity among a broader sea of technology companies. And yet, today, Nvidia is the third-largest in the world as measured by market cap, making it more valuable than Amazon, Alphabet, Meta Platforms, Tesla, and Berkshire Hathaway.
With AI looking like the next generational opportunity for investors, Nvidia may appear the most lucrative choice of all, given its influential role and seemingly unstoppable potential. However, a recent remark from Nvidia CEO Jensen Huang has me questioning just how much longer the stock can soar.
What did Jensen Huang just say?
Last week, investment bank Goldman Sachs hosted the Communacopia + Technology Conference, where analysts were granted rare access to Huang to ask questions related to Nvidia’s product roadmap, customer use cases, and broader industry trends.
Considering Nvidia has consistently blown out Wall Street’s expectations over the last couple of years, you’d think most questions presented to Huang would focus on the prospects of more record growth. But one analyst actually took a different approach: The analyst asked Huang what he’s worried about despite Nvidia’s market-leading position and strong secular tailwinds fueling its business.
Here was Huang’s response:
Well, our company works with every AI company in the world today. We’re working with every single data center in the world today. I don’t know one data center, one cloud service provider, one computer maker we’re not working with. And so what comes with that is … [an] enormous responsibility and we have a lot of people on our shoulders and everybody is counting on us and demand is so great that delivery of our components and our technology and our infrastructure and software is really emotional for people, because it directly affects their revenues, it directly affects their competitiveness. And so we probably have more emotional customers today than — and deservedly so. And if we could fulfill everybody’s needs, then the emotion would go away but it’s very emotional. It’s really tense. We’ve got a lot of responsibility on our shoulder and we’re trying to do the best we can.
I know that’s a jam-packed, run-on sentence. And candidly, there are a lot of themes in there that suggest Nvidia is in a good spot.
But the explanation above doesn’t inspire the same sense of confidence in me that it might for other investors. Instead, it makes me a little nervous.
Why does this make me nervous?
Nvidia’s roster of chipsets, called graphics processing units (GPUs), includes its highly touted A100, H100, and new Blackwell series. As it stands today, some industry research suggests Nvidia holds 88% of the AI chip market.
Huang really wasn’t exaggerating when he said, “Everybody is counting on us.” Considering the release of the Blackwell chips was recently delayed due to a design flaw, Huang’s remarks about customers being emotional make a lot of sense.
It’s these ideas that have me concerned. Nvidia is no longer just viewed as another semiconductor stock. Rather, the company itself is largely seen as a barometer for the health of the overall AI market. Given this change in perception and the pressure to deliver that comes with it, I’m beginning to think Nvidia’s stock price action is increasingly vulnerable.
Said another way, even if Nvidia delivers a strong quarter of growth, investor expectations are becoming so sky-high that good may not be good enough. When you layer on top just how much influence Nvidia has in the chip space, it’s natural to think it’s only a matter of time before even the slightest hiccup could take a material toll on the share price.
Image source: Getty Images.
Has Nvidia stock peaked?
I cannot say with any justifiable certainty whether Nvidia stock is headed higher or not. What I do believe with strong conviction is that shares of Nvidia are unlikely to rise by another 700%. Even in the long run, I think such a move is doubtful.
There are already several reasons to be wary of Nvidia’s long-term growth prospects. At the moment, nearly half of the company’s revenue is concentrated in just four customers. Yet, many of these customers are spending significant sums to make their own chips and migrate away from Nvidia.
The combination of rising competition, decelerating revenue and margin trends, and the immense (and unrealistic) expectations that Nvidia will continue to deliver top-tier products and business results in perpetuity brings me to the opinion that Nvidia stock may have peaked.
While further gains are probably in store, I think these will be short-lived. Ultimately, I think Nvidia stock will normalize sooner than many are anticipating. For that reason, investors should consider all pieces of the puzzle before pouring into the semiconductor darling going forward.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, Goldman Sachs Group, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.