Artificial intelligence (AI) has been one of the biggest investment storylines over the last two years. And while the prospects of AI are lucrative, not every opportunity touching the technology is the same.
With shares up more than 700% since January 2023, Nvidia (NVDA +4.30%) has become one of the biggest names in the AI realm. The company's chipsets, called graphics processing units (GPUs), are a critical component of generative AI development.
Although Nvidia has so far emerged as the dominant force in the GPU space, there are a variety of factors that could influence its stock price up or down in the coming years.
Let's explore some important details surrounding Nvidia's business and how they could impact the narrative surrounding Nvidia's growth prospects.
NASDAQ: NVDA
Key Data Points
Some short-term catalysts for Nvidia
Today, Nvidia's GPU roster is hallmarked by its A100 and H100 chipsets. The H100 has become a staple for AI development among big tech companies such as Meta Platforms and Tesla.
Moreover, the company's long-awaited new Blackwell series GPUs are finally set to hit the market. Nvidia's management already told investors that Blackwell shipments should drive billions in revenue during the fourth quarter, and shipments should continue into next year. I see the activity surrounding Blackwell as a catalyst for Nvidia and one that should help continue accelerating its revenue and profits.
Corporations of all sizes have been operating under stricter financial controls and smaller budgets over the last couple of years. But the Federal Reserve's recent reduction to interest rates could spur some renewed buying activity in the AI marketplace, and I see Nvidia as a beneficiary from these tailwinds.
All told, I would not be surprised to see Nvidia stock rise over the next few months. While this may seem encouraging, in the next section, I will break down several factors that could influence Nvidia's share price more materially in the long run.
Image source: Getty Images.
Longer-term headwinds facing Nvidia
I see three big-ticket items that could put some major pressure on Nvidia over the next few years.
1. Competition: At the moment, Nvidia's direct competition primarily stems from Advanced Micro Devices and Intel. While Nvidia has done a good job fending off these cohorts, I'm actually a bit more concerned about the company's tangential competition.
"Magnificent Seven" members including Microsoft, Amazon, Tesla, and Meta are in early stages of developing their own chips and AI training platforms. As I alluded to above, Tesla and Meta are known Nvidia customers. Furthermore, it's long been rumored that Microsoft could be Nvidia's largest customer.
Considering 46% of its revenue is concentrated among just four customers, I see the ambitious endeavors of these Magnificent Seven peers as a major signal that they are looking to move away from a reliance on Nvidia GPUs and compete directly with the company.
As more competition enters the chip space, I would not be surprised to see Nvidia's revenue and profitability begin to decelerate materially.
2. Cyclicality: Remember when I said that not all AI opportunities are the same? Technology stocks in general can be cyclical businesses.
Even though chips are one of AI's hottest commodities right now, these demand trends will normalize over time. When you layer the introduction of more chips from the competitors I outlined above, there's a good chance Nvidia's growth will become even more protracted if AI spending in general starts to witness a slowdown.
3. Government: The last concern I'll share about Nvidia is the possibility for government intervention. At the moment, Nvidia is estimated to have 88% share of the GPU market. Moreover, there have been some concerns that Nvidia's tightly integrated system featuring its GPUs and its CUDA software platform helped the company form a monopoly and stifle competition. These allegations could come to a head in the form of a government investigation by the U.S. Department of Justice.
My 3-year outlook for Nvidia stock
Although the Blackwell launch and a strengthening economy should benefit Nvidia's business (and therefore the stock), I think there are too many hurdles facing the company in the long run to warrant an overwhelmingly bullish outlook.
To be clear, I don't see Nvidia as a poor investment choice at all. But the combination of rising competition from its own customers, the likelihood of AI spending normalizing, and the possibility of the government taking some action against Nvidia has me thinking the stock will face tougher days over the next few years.
I think if Nvidia's business starts to show consistent signs of deceleration, the company's valuation multiples will start to contract and the stock will lose its premium. For these reasons, I see Nvidia stock valued lower in three years than it is today.
