For the past three decades, Wall Street and investors have been on a never-ending quest to find the next big investment trend. Some of these trends have completely changed the growth trajectory of the US economy, such as the advent of the Internet. Currently, no innovation is attracting the attention of professional and everyday investors like artificial intelligence (AI).
Broadly speaking, AI involves using software and systems to handle tasks that normally fall to humans. What makes AI so interesting is machine learning, which allows software and systems to become more sophisticated over time, which can translate into greater proficiency in assigned tasks or perhaps learning new tasks.
The reason AI stocks have skyrocketed is because the technology (in theory) has applications in almost every sector and industry. This has led PwC analysts to predict that AI will add close to $16 trillion to global gross domestic product by 2030.
No company has benefited more directly from the AI revolution than Nvidia.
But make no mistake about it: a semiconductor company Nvidia (NASDAQ: NVDA ) Artificial intelligence is the undeniable face of the revolution.
In little more than a year, Nvidia has established itself as the backbone of AI-accelerated data center infrastructure. The company’s high-powered A100 and H100 graphics processing units (GPUs) are staples of enterprise-powered high-compute data centers. But according to high expectations released by analysts last year CitigroupNvidia could account for 90% of GPUs used in AI-accelerated data centers in 2024.
Another factor helping Nvidia is that enterprise demand has outstripped the supply of its AI GPUs. In economics, the law of supply and demand states that if the supply of a commodity is limited and the demand is high, the price of that commodity increases. The simple fact that data center sales growth has grown several times faster than Nvidia’s cost of revenue shows that the company is enjoying exceptional pricing power on its high-end GPUs. Is.
The likely good news in the current fiscal year — Nvidia’s 2025 fiscal year begins on January 29, 2024 — is that GPU production should increase meaningfully. Leading chip maker Taiwan Semiconductor Manufacturing is significantly increasing its chip-on-wafer-on-substrate (CoWoS) capability. High-bandwidth memory systems are a practical requirement for AI-accelerated data centers, and they are packaged at CoWoS. With the supply chain easing, Nvidia should be able to meet demand from more enterprise customers this year.
But despite this seemingly perfect scenario, Wall Street’s AI darling could be headed for disaster.
It’s Nvidia’s stats that should have optimists doing a double take.
There’s no shortage of reasons why Nvidia could struggle to maintain a market cap of more than $2 trillion. Just this week I pointed to its historically high valuation over the past 12 months of sales, as well as trends for the next big thing to navigate early-stage bubbles, such as Nvidia’s growing There are valid reasons to be skeptical of hoy stocks.
But arguably no more terrifying than Nvidia’s consumer concentration.
Before Nvidia reported its fiscal fourth-quarter results on February 24, Bloomberg et Barclays The research revealed Nvidia’s top customers as a percentage of total sales. The company’s four largest customers account for 40% of total revenue and include:
Customer concentration is not a problem in itself. In fact, you could make a solid argument that having some of the world’s most influential innovators as its top customers is an advantage for Nvidia.
The problem for the infrastructure backbone of the AI movement is that its four largest customers by revenue are actively developing their own AI chips to complement the Nvidia GPUs they use to power their high-compute data. Buying for centers. This is a clear indication that all four companies aim to reduce their reliance on Nvidia’s GPUs in later years, or prefer to ditch Nvidia’s infrastructure entirely in favor of internally developed technology. .
The other problem is that even if Microsoft, Meta, Amazon, and Alphabet continue to buy Nvidia’s GPUs, we’re seeing a peak in orders in 2024.
For example, Meta spent about $27.3 billion on property and equipment last year. The company is buying 350,000 H100 GPUs from Nvidia at a cost of up to $10.5 billion. This is a huge percentage of Meta’s annual capital expenditure coming from a single purchase, which is certainly not going to be replicated in future years. CEO Mark Zuckerberg has noted that his company will have “about 600,000 H100-equivalent computes if you include other GPUs” by the end of 2024. Presumably, Meta’s chiefs are reportedly using Nvidia’s as well as Meta’s in-house developed AI chips. GPUs.
The point is that Nvidia’s top customers are either moving away from its GPU technology, or are highly unlikely to maintain their current order activity beyond the current year. It’s a potentially scary scenario for Wall Street’s most popular AI stock, which is getting little attention.
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randy Zuckerberg, former director of market development and spokeswoman for Facebook and sister of MetaPlatforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Sean Williams has positions in Alphabet, Amazon and Meta platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, MetaPlatforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Barclays Plc and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a Disclosure Policy.
The Scariest Nvidia Stats That Virtually Nobody’s Talking About was originally published by The Motley Fool.