Semiconductor giant Nvidia (NASDAQ: NVDA) came out with excellent results for the first quarter of fiscal 2025 (ending April 28, 2024), with revenue and earnings easily surpassing Wall Street consensus estimates. The company’s booming artificial intelligence (AI) powered data center segment was the key reason for this exceptional performance. Data center revenues rose 427% year over year to $22.6 billion in the first quarter.
With the rapid advancement and adoption of generative AI technologies, cloud service providers, enterprises, startups, and even sovereign governments are widely using Nvidia’s GPUs (Hopper architecture-based H100 chips) for training and inferring large language models. The existing global data center infrastructure worth trillions of dollars, based on ‘dumb’ network interface cards (NICs) and central processing units (CPUs), is being transitioned to accelerated computing. Enterprises are also preparing to transition their H100 GPU-based accelerated computing infrastructure to that based on the superior H200 chip and next-generation Blackwell systems. All of these tailwinds bode extremely well for Nvidia’s financial and stock price performance in the coming months.
On May 22, Nvidia announced a 10-for-1 stock split, effective June 10, 2024. While the split doesn’t change a company’s fundamental story or growth prospects, it does make the stock more accessible to a broader base of retail investors.
While Nvidia’s first-quarter results were undoubtedly positive, investors should be aware of some potential challenges before choosing this stock.
Competitive pressure
It’s no secret that Nvidia’s rapid market share gains stemmed directly from its complete dominance of the AI hardware market. However, Nvidia has been experiencing supply problems for its H100 chip for several months. The company also expects demand for its new H200 chip and next-generation Blackwell system to exceed supply until next year.
Against this background, the rise of Advanced micro devices‘ MI300X GPUs and the advent of IntelAt least in the short term, the Gaudi 3 AI accelerator could put a dent in the market share of Nvidia’s AI chips. While Nvidia’s recently launched chips are superior in computing power, MI300X and Gaudi 3 are more cost-effective at running AI workloads. Nvidia may also face competition from cloud companies such as Alphabet And Amazonthat develop in-house AI chips and custom solutions for specific workloads.
Nvidia must quickly ramp up production of its AI chips to avoid a significant loss of market share. Furthermore, because cloud service providers and hyperscalers require a large quantity of AI chips and are highly price sensitive, Nvidia may also have to significantly reduce the price of its AI chips to remain competitive. As the AI market matures and workloads become standardized, Nvidia may also face increasing competition from low-cost, targeted, custom AI solutions.
These challenges could impact Nvidia’s revenue and earnings performance in the coming months.
Geopolitical tensions
In September 2022, the US government banned Nvidia from exporting its powerful AI chips to China. Since then, export restrictions have continued to increase and now also apply to the slightly delayed A800 and H800 chips.
Although Nvidia has developed new products that do not require an export control license, these restrictions have significantly affected the company’s data center revenues in China. Nvidia expects the Chinese market to be more competitive in terms of prices and market share.
The US government has also delayed shipments of Nvidia’s AI chips to the Middle East, including the United Arab Emirates and Saudi Arabia.
These export restrictions will harm the company’s international market growth in the coming months.
Aging of products
Nvidia accelerated the pace of launching the new chip from two years to one year to fend off competition. However, this strategy could also lead to the company cannibalizing its older product range with next-generation products. As customers look to optimize their AI infrastructure, they may choose to delay their purchases to access the latest technology.
Nvidia trades at a price-to-earnings (P/E) ratio of 36.7, which is lower than its three-year average price-to-earnings ratio of 91.
So while the warnings in the company’s transcript can’t be completely ignored, investors shouldn’t write off Nvidia completely. The company’s full-stack approach to accelerated computing (advanced AI chips, AI-optimized networking solutions, CUDA software ecosystem), flexible architectures (Hopper, Grace, Blackwell), and commitment to innovation have been solid differentiators . Given that it has proven to be a major disruptive force in the AI industry, investors may want to consider buying at least a small stake in this stock – even at its current high price levels.
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Suzanne Frey, a director at Alphabet, 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. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
3 subtle warning signs from Nvidia’s earnings results that investors probably missed, originally published by The Motley Fool
