Nvidia's (NVDA 6.18%) stock closed at its all-time high of $493.51 on Aug. 31, 2023, which represented a stunning 227% gain over its previous 12 months. The company's stock soared as the growth of the artificial intelligence (AI) market sparked brisk sales of its high-end data center GPUs, which are used to process complex machine learning and AI tasks.
Nvidia's stock has only pulled back about 7% from its all-time high, even as more bright red flags appeared on the horizon. Let's review three of those recent threats -- and what they mean for its future.
Nvidia CEO Jensen Huang. Image source: Nvidia.
1. Intel is seeing growth in the GPU market
Nvidia's gaming GPU sales rose 22% year over year in the second quarter of fiscal 2024 (which ended on July 30) and finally ended its four-quarter streak of declines. This segment, which accounted for 18% of the company's revenue during the quarter, had been struggling as consumers bought fewer PCs in a post-pandemic market.
The bulls believe Nvidia's gaming GPU sales will stabilize and recover as more graphically demanding games drive PC owners to upgrade their systems. However, Nvidia's two smaller rivals in the high-end GPU market -- Advanced Micro Devices (AMD 2.37%) and Intel (INTC -9.20%) -- could disrupt that recovery with their iGPUs (integrated GPUs), which bundle together CPUs and GPUs in a single processor.
AMD and Intel both produce their own x86 CPUs, so integrating GPUs into those chips could eventually push Nvidia -- which doesn't make its own x86 CPUs -- out of the PC market. According to JPR, Nvidia's share of the entire GPU market (including discrete GPUs and iGPUs) held steady year over year at 18% in the second quarter of 2023. However, AMD's share dropped from 20% to 14% as Intel's share grew from 62% to 68%.
In the iGPU market, Intel's share grew from 78% to 84% as AMD's share dropped from 22% to 16%. That growth is worrisome because Intel doesn't only produce low-end iGPUs anymore. Intel actually rolled out its own Arc discrete GPUs over the past 17 months, and its upcoming Meteor Lake mobile processors will reportedly include an iGPU that provides comparable performance as Nvidia's mid- to high-end discrete GPUs.
Nvidia still controlled 87% of the discrete GPU market in the second quarter of 2023, according to JPR, compared to AMD's 10% share and Intel's 3% share. But if Intel plays its cards right and continues to roll out new Arc GPUs and iGPUs, it could chip away at Nvidia's base of PC users and curb the growth of its gaming business.
2. Microsoft and OpenAI are developing their own AI chips
Nvidia's recent growth spurt relies heavily on data centers upgrading their GPUs to process AI tasks. That's why its data center chip sales soared 171% year over year in the second quarter of fiscal 2024 and accounted for 76% of its top line.
A lot of that buying frenzy was driven by OpenAI's ChatGPT, which runs on Nvidia's GPUs. ChatGPT's popularity prompted other tech giants to upgrade their AI capabilities and roll out similar generative AI services. It also drove Microsoft (MSFT 1.82%) to become OpenAI's biggest backer and integrate ChatGPT into its own search engine and cloud services.
Therefore, ChatGPT's growth directly supports the bullish thesis for Nvidia. However, a recent report from The Information claimed Microsoft could soon unveil its own first-party AI chips to cut costs and reduce its long-term dependence on Nvidia. Another Reuters report claimed OpenAI was mulling the development of its own AI chips for similar reasons.
The development of those first-party chips wouldn't be too surprising, since Alphabet's Google, Meta Platforms, and Amazon are all reportedly developing their first-party AI chips. But if Microsoft and OpenAI also hop aboard that bandwagon, investors should wonder if Nvidia will still produce the default GPUs for accelerating AI tasks in the future.
3. The government expanded export curbs on its AI chips
Last year, the Biden administration blocked Nvidia from selling its top-tier A100 and H100 data center chips to Chinese customers amid concerns they could be used to develop advanced AI weapons and cyberattacks. At the time, Nvidia said it partly offset that impact by selling its lower-end A800 and H800 chips in China.
But this August, the Biden administration tightened those rules to block U.S. investments in Chinese chips, quantum information technologies, and AI. In its latest 10-Q filing, Nvidia also revealed that the U.S. government had introduced new licensing requirements for all exports of A100 and H100 products from "some countries in the Middle East" to other overseas markets like China and Russia. Those tightening restrictions could throttle the overseas growth of its data center business.
Should the Nvidia bulls ignore these red flags?
Nvidia still has a bright future, and its stock doesn't seem terribly expensive at 29x forward earnings. That said, Intel's baby steps in the GPU market, the creeping threat of first-party AI chips, and tighter export curbs could still toss a wrench into Nvidia's long-term plans. Investors shouldn't ignore these three red flags since they challenge the popular notion that Nvidia is an evergreen play on the AI and high-end gaming markets.
