This is the world of Nvidia (NASDAQ: NVDA ), and investors are just living in it. At least, that’s how it felt in 2023 and 2024. The chipmaker and leading provider of artificial intelligence (AI) computing infrastructure now has a market capitalization of more than $3 trillion, making it the third-largest company in the world. It’s up nearly 3,000% over the past five years, making it one of the best-performing stocks of all time and making longtime shareholders incredibly wealthy.
I predict this incredible stock price rally will come to an end soon. It has nothing to do with the company’s earnings release on August 28th, but to do with increased competition that may impact Nvidia’s pricing power in the long term. Here are some reasons why I believe Nvidia’s incredible stock price rally will come to an end within the next few years:
Cloud vertical integration
Nvidia’s operating profits have grown more than 2,000% over the past five years, to $48 billion. This growth comes as Nvidia’s chips are the primary means of computing for the new AI tools that are sweeping the tech world. As the only large-scale supplier of these key chips, and with a technological lead over competitors like Intel, Nvidia has realized skyrocketing revenues and profit margins by selling these scarce resources at sky-high prices.
Its three biggest customers are Amazon, Alphabet (Google) and Microsoft, the three giants of cloud computing that serve as the foundation for new AI algorithms and software. Collectively, these three companies spend more than $10 billion, and possibly $20 billion, a year on Nvidia chips. Now, it appears Nvidia has upset the cloud hornet’s nest.
In a move that hasn’t received much attention from Wall Street, these cloud providers have announced huge investments to manufacture their own AI chips. Amazon, for example, is now manufacturing its own chips, called Inferentia and Trainium, that compete directly with Nvidia. While these products currently lag Nvidia in computing power, given all the money going into Nvidia chips, it makes sense for Amazon to pour billions of dollars into research and development to improve these products.
Google has its own tensor processing units (TPUs) and Microsoft has announced investments in in-house chip development. It may take years to scale, but supply will only increase, giving Nvidia more competition, not less. To make matters worse, those competition will come from Nvidia’s own customers.
Competition erodes pricing power
The key to Nvidia’s stock price growth over the past two years has been the expansion of its operating margins. From a low of nearly 15%, Nvidia’s operating margins have risen to about 60% over the past 12 months. This has actually contributed more to Nvidia’s profit growth than revenue. Revenue has grown 228% over the past three years, and operating margins are nearly four times higher than their lows.
NVIDIA has been able to maintain tremendous margins due to the current lack of competition for AI computer chips. This translates into pricing power, accelerating revenue growth and expanding margins. This is a great set of catalysts for the stock. However, this could reverse if competition increases. This is happening with the big three cloud providers. If these providers increasingly replace NVIDIA chips with their own brands, NVIDIA’s revenue and profit growth will be affected.
To be clear, the timeline for this race is not 2024. It may take years for Amazon, Microsoft, and Google to make a dent in Nvidia’s AI chip business. But the price hikes Nvidia has implemented give these companies a big incentive to do so. The big three cloud providers have plenty of cash to spend on expanding these divisions. And they’re working on it.
NVDA PE Ratio Chart
NVDA PE ratio data from YCharts.
Risks for Nvidia Stock
Nvidia’s stock is rallying like crazy right now because its earnings and revenue are growing at a crazy pace. Increased supply of AI chips from competitors, whether that be Amazon or others, could be a double headwind for Nvidia’s financials.
Increased competition means an increased supply of chips available to cloud providers and other AI chip buyers. The simple law of supply and demand means that as supply increases and demand remains the same, prices will fall. This leads to slowing revenue and lower profit margins, both of which are negatively impacting Nvidia’s ability to make money.
Currently, Nvidia has a price-to-earnings (P/E) ratio of 73, which is nearly three times the average of the S&P 500 index. This is based on historical earnings with a very high margin of 60%. Less pricing power will impact earnings and margins. In numbers, this means that even if Nvidia sells more computer chips in the coming years, its profits could actually fall significantly.
A stock with declining earnings would never trade at a P/E of 73. Also, remember that if earnings margins fell to “only” 40%, this P/E would be over 100 on the current market cap of $3 trillion. This makes Nvidia stock incredibly risky, which is why I predict the company’s monster stock rally is nearing an end. The company remains a quality business, but it does not deserve to be trading at a $3 trillion market cap at this point.
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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. Brett Schafer invests in Alphabet and Amazon. The Motley Fool has invested in and recommends Alphabet, Amazon, Microsoft, and NVIDIA. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Prediction: This is what finally puts an end to Nvidia’s monster stock rally. This was originally published by The Motley Fool.