Nvidia Is a Top AI Stock, but Don’t Ignore These 4 Red Flags

Nvidia‘s (NASDAQ: NVDA) stock has rallied greater than 600% over the past two years. Most of that rally was driven by the expansion of the substitute intelligence (AI) market, which boosted its sales of information center GPUs for processing complex AI tasks.

The market’s insatiable demand for its data center chips continues to outstrip its available supply, and analysts expect Nvidia’s revenue to extend at a compound annual growth rate (CAGR) of 45% from fiscal 2024 to fiscal 2027 (which ends in January 2027). They expect its earnings per share (EPS) to rise at a CAGR of 51%.

Image source: Nvidia.

So despite the fact that Nvidia is already value greater than $3 trillion, it could still have loads of room to run. But before investors buy this high-flying stock, they need to concentrate to those 4 red flags that might unexpectedly end its historic rally.

1. It’s develop into an all-in play on AI chips

Back in fiscal 2022 (which resulted in January 2022), Nvidia generated 46% of its revenue from its gaming GPUs, 39% from its data center GPUs, and the remainder from its skilled visualization, auto, and OEM chips. Nonetheless, that product mix completely modified over the next two years as its sales of information center chips eclipsed its gaming chips.

In the primary 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. It generated $22.6 billion in data center revenue in that single quarter in comparison with its total revenue of nearly $27 billion for all of fiscal 2023. That breakneck expansion transformed Nvidia from a more diversified GPU maker to an all-in play on AI chips.

That is fantastic if you happen to consider Nvidia will proceed dominating the AI market because it expands. But when the AI market abruptly cools off, Nvidia’s chip shortage could quickly develop into a supply glut. If its data center business sputters out, it may well’t fall back on the expansion of its gaming segment and other smaller divisions to melt those year-over-year comparisons.

2. It faces unpredictable regulatory challenges

Nvidia’s overwhelming dependence on the AI market exposes it to a whole lot of unpredictable regulatory challenges. U.S. regulators have repeatedly tightened their export curbs on its AI chip shipments to China, and that pressure could drive Chinese chipmakers to speed up the event of their very own AI chips.

Tighter regulations for generative AI technologies, which have already taken effect in Europe, could throttle the expansion of the red-hot industry and drive corporations to rein of their purchases of recent AI chips. Complaints about mass plagiarism and other ethical issues could also force AI corporations to expand at a slower and more measured pace.

3. It faces clear competitive threats

Nvidia controls 88% of the discrete GPU market, based on JPR, but its top rival AMD has been rolling out cheaper AI accelerators. AMD’s MI300 Instinct GPUs have already beat Nvidia’s H100 GPUs — which cost about 4 times more — when it comes to raw processing power and memory usage across several industry benchmarks. Intel also recently claimed its recent Gaudi 3 AI accelerators are faster and more power efficient than Nvidia’s H100 GPUs.

Super Micro Computer, which grew rapidly over the past few years by producing dedicated AI servers powered by Nvidia’s chips, has also been developing recent servers optimized for AMD’s and Intel’s cheaper AI accelerators. These cheaper servers could attract cost-conscious data center operators and erode Nvidia’s market share.

Meanwhile, Nvidia’s tight supply and high prices are driving its top customers — including OpenAI, Microsoft, Alphabet‘s Google, and Amazon — to develop their very own first-party AI accelerators. These chips won’t threaten Nvidia’s near-term growth, but they might steadily loosen its iron grip on the hyperscale data center market.

4. Its insiders are net sellers

Nvidia’s stock is not low cost at 49 times forward earnings and 26 times this 12 months’s sales. But when it had the potential to double or triple again in near term, its valuations would appear reasonable and its insiders must be scooping up more shares.

Yet over the past 12 months, Nvidia’s insiders sold greater than 4 times as many shares as they bought. Over the past three months, they sold greater than 52 times as many shares as they bought. Those insider sales don’t necessarily mean it stock is headed off a cliff, but it surely’s a worrisome trend that means its near-term upside is restricted.

Is it still protected to purchase Nvidia’s stock?

I feel Nvidia remains to be value buying, but investors shouldn’t assume it’s an ideal growth stock. Its transformation from a gaming company into an AI one was abrupt, and it could experience significant growing pains over the subsequent few years. But assuming it overcomes all those competitive, regulatory, and macro challenges, it should remain considered one of the simplest ways to take advantage of the secular expansion of the AI market.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Idiot’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Leo Sun has positions in Amazon. The Motley Idiot has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft, and Nvidia. The Motley Idiot recommends Intel and recommends the next 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 Idiot has a disclosure policy.

Nvidia Is a Top AI Stock, but Don’t Ignore These 4 Red Flags was originally published by The Motley Idiot

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