September turned out to be a forgettable month for Nvidia (NVDA +1.67%) investors as share prices of the semiconductor bellwether fell 13% so far this month. The drop is surprising because there was no company-specific news in that time to justify such a price drop.
One reason Nvidia took a breather this month might have been because of a broader pullback in the stock market. The Nasdaq-100 Technology Sector index, for instance, is down 6% in September, while the S&P 500 has pulled back 4%. The Federal Reserve's warning that further interest rate hikes could be on the way to curb inflation suggests that stocks could remain under pressure.
Also, a couple of reports have recently pointed out that Nvidia stock's artificial intelligence (AI) bubble could be about to burst because of its expensive valuation and the viability of this technology in the long run, which might have created doubts in investors' minds about the sustainability of the stock's tearing run.
So, with shares of Nvidia up 190% so far in 2023, should investors consider selling this high-flying stock and book profits? Let's take a closer look and see if an answer presents itself.
NASDAQ: NVDA
Key Data Points
Nvidia's competitors are gaining traction
There are concerns that Nvidia's dominant position in AI chips could be under threat from rivals Intel (INTC 0.07%) and Advanced Micro Devices (AMD +0.05%).
Nvidia reportedly controls more than 80% of the market for AI chips, according to third-party estimates, since its data center graphics processing units (GPUs) have been the go-to chips for companies looking to train AI models. But the downside is that customers are having to wait as long as six months to get their hands on its GPUs.
This is where the company could lose business to AMD and Intel, which have started gaining traction in the AI chip market already. Intel, for example, has a revenue pipeline of more than $1 billion for its AI chips that extends into 2024, having landed multiple big-name customers, including Amazon Web Services.
Intel expects its pipeline of AI customers to expand further, and its offerings can reportedly give Nvidia's flagship H100 AI-focused GPU a run for its money while performing certain tasks.
AMD's AI accelerators are also witnessing strong interest from customers. The company anticipates a big jump in its data center revenue in the fourth quarter once it launches its MI300X AI accelerator, which is also targeting Nvidia's H100. The MI300X packs in 2.4 times more high-bandwidth memory and has a 1.6 times faster bandwidth compared to the H100.
Nvidia's rivals want a piece of the lucrative market for AI chips, which is expected to generate $304 billion in annual revenue in 2030 versus $29 billion last year, according to Next Move Strategy Consulting.
The intensifying competition and Nvidia's sky-high valuation are likely to weigh on the stock after its terrific surge this year has brought the price-to-earnings ratio to 102, which is higher than its five-year average multiple of 74. Any signs of weakness due to Intel and AMD could give investors a reason to press the sell button, especially considering the shares' valuation.
But at the same time, there are a few reasons those thinking of booking their profits in this semiconductor bellwether could regret doing so.
Investors should focus on the bigger picture
The market for AI chips is big enough to accommodate more than one player, so Nvidia could keep growing at a nice clip even if it faces more competition. As mentioned above, the AI chip market could generate over $300 billion in annual revenue by 2030. For comparison, Nvidia's revenue from AI chips is expected to land between $25 billion to $30 billion this year, according to Japanese investment bank Mizuho.
Analyst Vijay Rakesh of Mizuho estimates that Nvidia could clock $300 billion in annual AI revenue in 2027 even if it controls 75% of this market. While that seems like a very ambitious forecast, even a 50% share of the AI chip market -- after accounting for the increased competition -- could translate into healthy growth for Nvidia through 2030.
The chipmaker is expected to deliver $54 billion in revenue in the current fiscal year. Assuming it can generate $150 billion in sales of AI chips in 2030 (based on a market share estimate of 50% and the revenue estimate of $304 billion), it would be a fivefold to sixfold increase from the $25 billion to $30 billion revenue Nvidia is anticipated to generate from this market in 2023. That suggests the company's AI revenue could increase at a compound annual rate of around 30% for the next five years.
And investors shouldn't forget that Nvidia has already moved into the territory of Intel and AMD with its Grace server processors. As a result, the company could end up controlling a larger share of the AI chip market in the long run.
Also, AI is not the only catalyst that could drive substantial growth for Nvidia. Cloud gaming, automotive applications, and digital twins are some of the multiple lucrative opportunities that could help ensure healthy growth for a long time to come. That's why investors would do well to treat the weakness in Nvidia as a buying opportunity -- it could soon regain its mojo and start soaring once again.
