Nvidia (NVDA -3.87%) bulls have been out in full force this year, as shares of the chipmaker have surged 170% so far in 2023. That's not surprising, given how the company is benefiting from the proliferation of artificial intelligence (AI).
The semiconductor specialist recently delivered outstanding guidance for the ongoing quarter that crushed Wall Street's forecast by a massive margin. Still, there is one pain point that may weigh on Nvidia stock, which is why it would be a good idea for investors to look at the bearish argument as well.
Let's take a closer look at the factors that could negatively impact Nvidia's red-hot rally.
The bearish argument against Nvidia stock
Nvidia's gaming business has taken a big beating in recent quarters, thanks to the weak demand for personal computers (PCs). The tepid PC demand has also weighed on the company's professional visualization business, which relies on sales of workstation PCs.
The gaming and professional visualization businesses together produced $2.54 billion in revenue in the first quarter of fiscal 2024 (for the three months ended April 30). That translates into 35% of Nvidia's total quarterly revenue of $7.2 billion. IDC points out that PC shipments dropped a whopping 29% year over year in the first calendar quarter of 2023, which coincides with Nvidia's fiscal quarter.
So it wasn't surprising to see Nvidia's combined revenue from the gaming and professional visualization businesses drop an alarming 40% over the prior-year period. This massive drop and the substantial influence of the PC-related businesses on Nvidia's top line sent its total revenue down by 13% year over year.
Nvidia pointed out that the ongoing inventory correction by channel partners in the PC graphics card market on account of weak demand and lower shipments was the reason behind the sharp revenue decline in these segments. As a result, Nvidia saw an increase in unsold inventories during the quarter. The company reported $4.61 billion in inventory in the first quarter of fiscal 2024, up 46% from the year-ago period's level of $3.16 billion.
These high inventory levels don't bode well for the company's margins. However, management believes that the inventory correction is now behind, and this chart suggests the same.
NVDA Inventories (Quarterly) data by YCharts
Nvidia's gaming revenue increased 22% on a quarter-over-quarter basis in fiscal Q1. Additionally, professional visualization revenue was up 31% sequentially. So, the only bearish argument against investing in Nvidia is losing its legs.
Of course, the bears may point out that the PC market is unlikely to recover this year due to macroeconomic headwinds, but Nvidia is pulling the right strings to ensure that it beats the downturn with its latest graphics cards, which could encourage more users to upgrade.
So, a sustained recovery in the gaming business, along with healthy growth in data centers, should ensure that Nvidia stock's tremendous run continues.
That brings us to the bullish argument.
The stock's bull run is here to stay
Nvidia's guidance for the second quarter of fiscal 2024 points toward a sharp jump in the company's revenue and earnings. The semiconductor giant expects to deliver $11 billion in revenue in the current quarter at the midpoint of its guidance range, which would be a 64% increase over the year-ago quarter. The non-GAAP (generally accepted accounting principles) gross margin forecast of 70% also points toward big gains over the year-ago period's reading of 45.9%.
However, don't be surprised to see Nvidia outperform its expectations. That's because Nvidia's AI catalyst is just getting started. The demand for AI chips is expected to explode big time in the long run, and Nvidia is one of the best ways to play this lucrative market, given its solid share of this space. Next Move Strategy Consulting estimates that the global market for AI chips could be worth $304 billion in 2030, as compared to just $29 billion last year, clocking annual growth of 29% over the forecast period.
Given that Nvidia has already built a robust customer pipeline for its AI chips, the company's data center business is at the beginning of a massive growth curve. More importantly, as Nvidia gets nearly 60% of its revenue from the data center segment, which is reaping the rewards of growing AI adoption, the solid growth in this segment has the potential to significantly lift the company's growth in the long run, given the huge end-market opportunity on offer.
This explains why Nvidia's growth is expected to gain terrific momentum.
NVDA EPS Estimates for Current Fiscal Year data by YCharts
Therefore, it won't be surprising to see Nvidia stock sustain its impressive momentum and deliver more upside. Wall Street also anticipates something similar, and analysts have been quick to rapidly increase their price targets on Nvidia stock.
As such, Nvidia investors would do well to hold on to this AI stock, as it looks built for more gains thanks to a strong bull case.
