NVIDIAof (NASDAQ: NVDA) The company's shares have risen more than 600% over the past two years, with much of that gain attributable to a growing artificial intelligence (AI) market that has boosted sales of data center GPUs to process complex AI tasks.
As the market's insatiable demand for data center chips continues to outstrip supply, analysts expect Nvidia's revenue to grow at a compound annual growth rate (CAGR) of 45% from fiscal year 2024 through fiscal year 2027 (ending January 2027). Analysts expect earnings per share (EPS) to grow at a CAGR of 51%.
So while NVIDIA is already worth more than $3 trillion, it still has plenty of room to rise. But before investors buy into this high-flying stock, they should be aware of four warning signs that could bring its historic rally to an unexpected end.
1. It's become an all-in play on AI chips
In fiscal year 2022 (ending January 2022), 46% of Nvidia's revenue came from gaming GPUs, 39% from datacenter GPUs, and the rest from professional visualization, automotive, and OEM chips. However, over the next two years, sales of datacenter chips surpassed those of gaming chips, completely changing the product mix.
In the first quarter of fiscal 2025, 87% of Nvidia's revenue came from data center chips, 10% from gaming chips, and the remaining 3% from other categories. The company generated $22.6 billion in data center revenue in the quarter alone. This is compared to total revenue of about $27 billion in the first quarter of fiscal 2025. all This rapid expansion has transformed Nvidia from a more diversified GPU maker into a company that's fully committed to AI chips.
If you believe that NVIDIA will continue to dominate the AI market as it expands, that's fine. But if the AI market cools off sharply, NVIDIA's chip shortage could quickly turn into a glut. If its data center business stalls, the company can't rely on growth in its gaming and other smaller divisions to cushion its year-over-year declines.
2. Facing unpredictable regulatory challenges
Nvidia faces numerous unpredictable regulatory challenges due to its overwhelming reliance on the AI market. U.S. regulators have repeatedly tightened restrictions on exports of AI chips to China, which could pressure Chinese chipmakers to accelerate the development of their own AI chips.
Tighter regulations on generative AI technology, already in place in Europe, could stifle growth in this burgeoning industry and cause companies to curtail purchases of new AI chips, while complaints of mass plagiarism and other ethical issues could force AI companies to expand more slowly and carefully.
3. They face clear competitive threats
According to JPR, Nvidia has 88% of the discrete GPU market, but its biggest rival is Am The company is rolling out cheaper AI accelerators: AMD's MI300 Instinct GPU already outperforms Nvidia's H100 GPU, which is about four times more expensive, in terms of raw processing power and memory usage in several industry benchmarks. Intel The company also recently claimed that its new Gaudi 3 AI accelerator is faster and more power efficient than Nvidia's H100 GPU.
Super MicrocomputerThe company has grown rapidly over the past few years by building purpose-built AI servers powered by Nvidia chips, and is also developing new servers optimized for cheaper AI accelerators from AMD and Intel that could attract cost-conscious data center operators and eat into Nvidia's market share.
Meanwhile, NVIDIA's supply shortages and rising prices have led to the company's major customers, including OpenAI, Microsoft, alphabetGoogle, and Amazon — Developing its own first-party AI accelerators. While these chips won't threaten Nvidia's near-term growth, they could chip away at the company's tight grip on the hyperscale data center market.
4. Insiders are net sellers
Nvidia's stock isn't cheap, trading at 49 times projected earnings and 26 times this year's sales, but if the stock has the potential to double or triple in the near future, that valuation seems reasonable and should encourage interested parties to buy more shares.
But over the last 12 months, Nvidia insiders have sold more than four times the shares they bought. Over the last three months, they sold more than 52 times the shares they bought. While these insider sales don't necessarily mean the company's stock price will crash, it's a worrying trend that suggests there may be limited upside potential in the near term.
Is it still safe to buy Nvidia stock?
I think Nvidia is still worth buying, but investors shouldn't assume it's the perfect growth stock. The company's transformation from a gaming company to an AI company was abrupt, and it could experience some major growing pains over the next few years. But assuming the company overcomes all of its competitive, regulatory and macro challenges, it should remain one of the easiest ways to profit from the long-term expansion of the AI market.
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Suzanne Frey, an Alphabet executive, 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 owns shares of Amazon. The Motley Fool owns shares of 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 a top AI stock, but don't ignore these 4 warning signs This was originally published by The Motley Fool.
