Nvidia's (NVDA -1.85%) market cap recently crossed $1 trillion, joining an elite club of tech stocks. Data centers are scrambling to upgrade their computing horsepower for artificial intelligence (AI) training, which made Nvidia's revenue go parabolic.
Wall Street analysts expect the company's revenue to double to $54 billion this year, but some investors wonder if Nvidia's growth is already baked into its high valuation. This is a good time to weigh the opportunities and potential headwinds that face Nvidia over the next year.
Here's one green flag and one red flag for this top AI stock.
Green flag: Nvidia is raking in the cash
The demand for Nvidia's AI hardware appears to be locked in through next year. The Financial Times recently reported that Nvidia plans to triple the production of its H100 AI processor to at least 1.5 million units in 2024. Considering the limited supply of these high-powered chips, planned production is a good indicator of future sales.
These are incredibly expensive processors. The scarcity of the H100 has them popping up for sale on Amazon and eBay for over $40,000 each.
The cost of these cards is why Nvidia is one of the best stocks to consider for the AI opportunity. Nvidia's net profit totaled $6.7 billion last quarter, up from $2.7 billion a year ago. This is why the stock has surged 211% year to date.
NVDA Net Income (Quarterly) data by YCharts
Red flag: Early signs of slowing growth
Nvidia's enormous profitability and growth came easily because it dominates the market for AI chips right now. However, AI researchers and developers are looking for alternatives considering the costs and limited availability. Nvidia's growth could slow as more competition comes into the market, and this could weigh on the stock's expensive valuation.
For the fiscal quarter ending October, Nvidia is calling for revenue to come in at approximately $16 billion, which is more than double the year-ago total but represents a growth rate of 18% over the previous quarter -- a slowing rate of increase over last quarter's 88% sequential growth.
The concerns about slowing growth seem to be already weighing on the stock's performance. After tripling in price this year, the stock is only up 7% in the last three months. Obviously, the company's forward guidance in the last earnings report wasn't enough to send the shares sharply higher as it did earlier this year. This suggests the company's near-term growth is already baked into the stock price.
Rival chip leader Advanced Micro Devices will launch its MI300 chip in the fourth quarter. AMD CEO Lisa Su believes the MI300's advantage with greater memory bandwidth will give the company success in the AI market. More memory is needed for inferencing, or the process of how an AI model learns to make predictions and solve problems based on information it has already processed.
Meanwhile, ChatGPT owner OpenAI is reportedly considering making its own AI chips, while Alphabet's Google Cloud and Amazon Web Services are already well along that path.
Nvidia stock trades at a high forward price-to-earnings ratio of 41. While Nvidia has a huge long-term opportunity as data centers upgrade their systems, I would be cautious about loading up on the stock after the huge run this year. It might be smart to wait for AMD to launch the MI300 and see what Nvidia's guidance looks like going into the new year before buying more shares.
