NVIDIA (NVDA -0.46%) had a great run over the past 12 months, rallying about 170% on robust sales and earnings growth. The chipmaker posted double-digit sales growth over the past three quarters and beat analyst estimates on the top and bottom lines for four straight quarters. But looking ahead, we can see four red flags indicating that NVIDIA's growth could slow down over the next year.
1. AMD strikes back
Earlier this year, AMD (AMD -2.12%) made a splash in the low-end "VR ready" GPU market with the RX 480, which was priced between $200 (4GB) and $240 (8GB). But NVIDIA responded quickly with the GTX 1060, which cost between $200 (3GB) and $250 (6GB). While the GTX 1060 had less memory than the RX 480, NVIDIA claimed that the 3GB version runs 10% faster than the 8GB version of the RX 480.
But the real threat to NVIDIA isn't AMD's Polaris-based RX cards -- it's AMD's next-gen chipset, Vega 10, which could leapfrog over NVIDIA's current-gen Pascal chipset. Vega 10 was originally expected to arrive next year, but AMD has reportedly moved the launch date to this holiday season. That pre-emptive strike in the high-end GPU market could cause a slowdown in NVIDIA's gaming GPU sales, which accounted for 55% of its revenue last quarter.
2. The high-end VR market could flat-line
Both NVIDIA and AMD hope that high-end VR headsets for PCs, such as Facebook's Oculus Rift and HTC's Vive, will persuade more gamers to upgrade their cards to "VR-ready" standards. That hasn't happened yet because of the high prices of both headsets -- the Rift costs $600 and the Vive costs $800.
A recent Steam survey found that only 0.1% of its gamers owned a Rift, and 0.18% owned a Vive. To make matters worse, Rift sales rose just 0.1% in August, and Vive sales were completely flat. Those paltry numbers are likely to reduce the appeal of developing high-end VR games for PCs.
Meanwhile, mobile-based VR headsets such as Gear VR and console-based ones such as Sony's PlayStation VR might gain more momentum because they're cheaper and mainstream consumers already own the smartphones and consoles. However, Qualcomm's (QCOM -1.83%) Adreno GPU powers most Android phones and AMD's APU powers the PS4 -- which cuts NVIDIA out of both VR markets.
3. Rising competition in adjacent markets
Last quarter, NVIDIA's data-center revenue more than doubled and accounted for 11% of its revenue. That growth was attributed to rising demand for its high-end Tesla GPUs in data centers, where they can process certain machine-learning tasks faster than Intel's (INTC 0.38%) Xeon Phi processors.
However, Intel is getting ready to strike back with Knights Mill, a third-generation Xeon Phi processor that could potentially close the performance gap with the Tesla GPUs next year. If Knights Mill offers comparable machine-learning performance to NVIDIA's GPUs, Intel can leverage its 99% market share in data-center CPUs to halt NVIDIA's advance.
NVIDIA faces similar challenges in the automotive market, where it provides automakers GPUs for infotainment, navigation, and driverless systems. NVIDIA's automotive revenue rose 68% annually last quarter and accounted for 8% of its top line, fueled by robust demand among high-end automakers.
However, Qualcomm has also been expanding into the same market with custom Snapdragon chips for connected cars, its acquisition of chipmaker CSR last year, and its rumored $30 billion bid for NXP Semiconductors (NXPI -0.57%) -- the biggest automotive chipmaker in the world. If Qualcomm acquires NXP, it could marginalize NVIDIA in connected cars with its bundling power and economies of scale.
4. Analysts are expecting a slowdown
Because of these challenges, analysts believe NVIDIA's revenue will rise 22% this year but grow only 7% next year. Earnings are expected to rise 71% this year, followed by just 3% growth next year. While we should take those long-term estimates with a grain of salt, NVIDIA's trailing P/E of 44 and forward P/E of 35 look a bit pricey relative to those expectations.
The bottom line
I believe NVIDIA is a solid long-term investment, but I'm not convinced it can continue rallying after its triple-digit gains over the past year. Therefore, investors should understand and evaluate these threats before buying any shares at current prices.