Nvidia‘s (NASDAQ: NVDA) The company’s stock has risen more than 600% over the past two years. Much of that rally was driven by growth in the artificial intelligence (AI) market, which boosted its sales of data center GPUs for processing complex AI tasks.
Insatiable market 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 (ending January 2027). They expect its earnings per share (EPS) to grow at a CAGR of 51%.
So even though Nvidia is now worth more than $3 trillion, it could still have plenty of room to grow. But before investors buy its hot stock, they should pay attention to these four warning signs that could bring an unexpected end to its historic rally.
1. It has become an all-out bet on AI chips.
In fiscal 2022 (ending January 2022), Nvidia generated 46% of its revenue from its gaming GPUs, 39% from its data center GPUs, and the remainder from its OEM, professional display, and automotive chips. However, that product mix completely changed over the next two years, as its data center chip sales eclipsed those of 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. In that single quarter, it generated $22.6 billion in data center revenue, compared to its total revenue of nearly $27 billion for the same period. all fiscal 2023. That breakneck expansion transformed Nvidia from a more diversified GPU maker to a full-time bet on artificial intelligence chips.
That’s fine if you believe Nvidia will continue to dominate the AI market as it expands. But if the AI market cools abruptly, Nvidia’s chip shortage could quickly turn into a supply glut. If its data center business falters, it can’t turn to growth in its gaming segment and other smaller divisions to smooth out those year-over-year comparisons.
2. Faces unpredictable regulatory challenges
Nvidia’s overwhelming reliance on the AI market exposes it to many unpredictable regulatory challenges. U.S. regulators have repeatedly tightened their restrictions on AI chip exports to China, and that pressure could push Chinese chipmakers to accelerate development of their own AI chips.
Stricter regulations for generative AI technologies, which have already come into force in Europe, could slow the growth of this booming industry and force companies to limit their purchases of new AI chips. Complaints about mass plagiarism and other ethical issues could also force AI companies to expand 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 has been releasing cheaper AI accelerators. AMD’s MI300 Instinct GPUs have already outperformed 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 It also recently claimed that its new Gaudi 3 AI accelerators are faster and more power-efficient than Nvidia’s H100 GPUs.
Supermicrocomputerwhich has grown rapidly in recent years by producing dedicated AI servers powered by Nvidia chips, has also been developing new servers optimized for cheaper AI accelerators from AMD and Intel. These cheaper servers could appeal to cost-conscious data center operators and erode Nvidia’s market share.
Meanwhile, Nvidia’s limited supply and high prices are alienating its major customers, including OpenAI, Microsoft, AlphabetIt’s Google and Amazon — to develop its own AI accelerators. These chips won’t threaten Nvidia’s near-term growth, but they could gradually loosen its tight grip on the large-scale data center market.
4. Your 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 seem reasonable and its management should buy more shares.
However, over the past 12 months, Nvidia executives sold more than four times as many shares as they bought. Over the past three months, they sold more than 52 times as many shares as they bought. Those executive sales don’t necessarily mean the stock is about to fall, but it’s a worrying trend that suggests its near-term upside potential is limited.
Is it still safe to buy Nvidia stock?
I think Nvidia remains worth owning, but investors shouldn’t assume it’s a perfect growth stock. Its transformation from a gaming company to an AI company was abrupt, and it could experience significant growth pains in the years ahead. But assuming it overcomes all those competitive, regulatory, and macroeconomic challenges, it should remain one of the easiest ways to benefit from the secular expansion of the AI market.
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Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. John Mackey, the 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: Intel $45 call options expiring January 2025, Microsoft $395 call options expiring January 2026, Intel $35 call options expiring August 2024, and Microsoft $405 call options expiring January 2026. 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