Nvidia‘S (NASDAQ: NVDA) shares have risen more than 600% in the past two years. Much of that rise has been driven by growth in the artificial intelligence (AI) market, which has boosted sales of data center GPUs designed to handle complex AI tasks.
The market’s insatiable demand for data center chips continues to outpace available supply, and analysts expect Nvidia’s revenue to grow at a compound annual growth rate (CAGR) of 45% from fiscal 2024 through fiscal 2027 (which ends in January 2027). They expect earnings per share (EPS) to grow at a CAGR of 51%.
So while Nvidia may be worth more than $3 trillion, it still has plenty of room to grow. But before investors buy into this high-flying stock, they should be aware of these four red flags that could unexpectedly end its historic rally.
1. It’s become an all-in-play on AI chips
In fiscal year 2022 (which ended in January 2022), Nvidia generated 46% of its revenue from its gaming GPUs, 39% from its data center GPUs, and the remainder from its professional visualization, automotive, and OEM chips. That product mix completely changed over the next two years, however, as data center chip sales surpassed gaming chip sales.
In the first quarter of fiscal year 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, compared to its total revenue of nearly $27 billion for the year all of fiscal 2023. That breakneck expansion transformed Nvidia from a more diversified GPU maker to a company focused solely on AI chips.
That’s fine if you believe Nvidia will continue to dominate the AI ​​market as it grows. But if the AI ​​market cools abruptly, Nvidia’s chip shortage could quickly become a supply glut. If its data center business spirals out of control, it won’t be able to fall back on growth in its gaming segment and other smaller divisions to cushion those year-over-year comparisons.
2. It 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 export restrictions on its AI chip shipments to China, and that pressure could push Chinese chipmakers to accelerate development of their own AI chips.
Tighter regulations on generative AI technologies, already in place in Europe, could slow the growth of the red-hot industry and prompt companies to curtail their purchases of new AI chips. Complaints about mass plagiarism and other ethical issues could also force AI companies to expand more slowly and in a measured manner.
3. It faces clear competitive threats
According to JPR, Nvidia controls 88% of the discrete GPU market, but its biggest rival AMD AMD Inc. is rolling out cheaper AI accelerators. AMD’s MI300 Instinct GPUs have already beaten Nvidia’s H100 GPUs — which cost about four times more — in terms of raw processing power and memory usage in various industry benchmarks. Intel 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 developed new servers optimized for AMD and Intel’s lower-cost AI accelerators. These lower-cost 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 biggest customers, including OpenAI, Microsoft, AlphabetGoogle, and Amazon — to develop their own first-party AI accelerators. These chips don’t pose a threat to Nvidia’s growth in the short term, but they could gradually loosen its iron grip on the hyperscale data center market.
4. Insiders are net sellers
Nvidia’s stock isn’t cheap, at 49 times expected earnings and 26 times this year’s revenue. But if it has the potential to double or triple again anytime soon, its valuation seems reasonable, and insiders should be buying up more shares.
Still, Nvidia insiders sold more than 4 times as many shares as they bought over the past 12 months. Over the past three months, they sold more than 52 times as many shares as they bought. That insider selling doesn’t necessarily mean the stock is headed for a cliff, but it’s a worrying trend that suggests near-term upside is limited.
Is it still safe to buy Nvidia stock?
I think Nvidia is still worth buying, 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 growing pains in the years ahead. But assuming it can overcome all those competitive, regulatory, and macro challenges, it should remain one of the easiest ways to profit from the secular expansion of the AI ​​market.
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Suzanne Frey, an executive 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. 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: long Jan 2025 $45 calls on Intel, long Jan 2026 $395 calls on Microsoft, short Aug 2024 $35 calls on Intel and short Jan 2026 $405 calls on Microsoft. 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
