When the word “semiconductor” is mentioned, it is almost impossible No Think about Nvidia (NASDAQ: NVDA) — and with good reason. Over the past five years, the company has grown its revenue and free cash flow by nearly 900% and 800%, respectively. With that level of growth, it’s no wonder industry analysts estimate that Nvidia holds at least 80% of the market share in artificial intelligence (AI) chips.
It seems that Nvidia is unstoppable. However, everything that goes up must come down sooner or later, right?
While poring over Nvidia’s second-quarter earnings report, I came across a metric that required a second look because I couldn’t believe my eyes. Specifically, I’m starting to realize that Nvidia’s customer concentration trends could suggest that the company’s growth could come to a screeching halt, and I think many investors might be surprised.
Let’s take a look at Nvidia’s customer concentration profile and explore why it’s important to understand.
What is customer centricity and why is it important?
Customer concentration measures a company’s revenue across its customer base. It helps answer questions that seek to determine how closely sales are related to a specific customer or group of customers. For example, let’s say you have a company with 10 customers, and together they generate $1 million in annual sales. However, one customer is responsible for $500,000. As an investor, would you feel comfortable buying a company that relies on a single customer for 50% of its annual revenue? Probably not.
What does Nvidia’s customer concentration look like?
In late August, Nvidia reported earnings for its second quarter of fiscal 2025. According to the company’s Q10 filing, 46% of total revenue came from just four customers. That’s right: Nearly half of Nvidia’s $30 billion in quarterly revenue came from just four customers. While quarterly business trends can fluctuate dramatically, a look at Nvidia’s historical customer concentration metrics might suggest that the company’s growth is increasingly reliant on a particularly small group.
During Nvidia’s first quarter (ended April 28), the company said that 24% of total revenue was attributed to two direct customers and that two indirect customers each accounted for at least 10% of revenue. One of these indirect customers, in fact, purchased its products through one of Nvidia’s largest direct customers.
In its annual report for fiscal year 2024 (ended January 28), Nvidia disclosed that 13% of total revenue for the year came from one customer (denoted as Customer A). The company further told investors that “one indirect customer that primarily purchases our products through system integrators and resellers, including Customer A, is estimated to have accounted for approximately 19% of total revenue.”
To put all of this into perspective, Nvidia revealed that no single customer accounted for 10% or more of total revenue during either fiscal year 2023 or fiscal year 2022. Clearly, over the past year alone, Nvidia has seen increasing demand for its chips, but much of this growth appears to be consistently coming from a limited number of customers.
Why is this particularly worrying for Nvidia?
It’s one thing to be concerned about increasing customer concentration trends. However, if we look at WHO The fact that this growth could be coming from a group of companies as big as the “Magnificent Seven” adds an additional level of alarm when assessing Nvidia’s growth prospects. While I can’t say for certain which companies specifically are among Nvidia’s top four, there are some good reasons to believe that much of the company’s growth can be attributed to the members of the “Magnificent Seven.”
Over the past year, executives such as Mark Zuckerberg and Elon Musk have cited that Goal and Tesla are aggressively buying up Nvidia’s popular H100 graphics processing unit (GPU). That’s big news, on the face of it. Being the AI chip of choice for two of the world’s biggest tech companies is more than just a nod of approval. Investors shouldn’t be jumping for joy, though.
During Tesla’s second-quarter earnings call earlier this summer, Musk gave some major signals that the company might try to compete with Nvidia in the future. Additionally, Meta has been ramping up its capital expenditure (capex) investments, and not all of that is good news for Nvidia. Meta has developed its own chip, dubbed the Meta Training and Inference Accelerator (MTIA), in an effort to move away from such a heavy dependence on Nvidia. On top of this, the e-commerce and cloud computing giant is also looking to increase its capex investments. Amazon It has also stepped up its efforts on its own AI roadmap, part of which includes developing its own training and inference chips.
To be clear, I don’t see increasing competition as an Achilles heel for Nvidia. Even if Big Tech starts cutting back on orders from Nvidia, I’m guessing the company won’t have any trouble finding new business. The real concern is that I think Nvidia will lose pricing power as more players enter the chip world. So while Nvidia is likely to continue delivering solid growth, I think the days of triple-digit revenue and profit acceleration may be coming to an end.
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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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. Adam Spatacco has positions with Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions with and recommends Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
Is Nvidia Really as Popular as You Think? A Number That Makes Me Worried About the Company’s Long-Term Prospects was originally published by The Motley Fool