Few companies exemplify the stock market's millionaire-making potential better than Nvidia (NVDA +1.90%). Shares skyrocketed over the last few years as enterprise clients rush to stockpile its advanced graphics processing units for running and training AI algorithms.
That said, with a market cap of $4.1 trillion, the chipmaker is already the most valuable company in the world, raising doubts about its ability to continue creating value. Let's dig deeper into the pros and cons of this iconic growth stock to try to figure out what the future might bring.
NASDAQ: NVDA
Key Data Points
Growth is starting to plateau
No company can maintain an abnormally large growth rate forever. Eventually, challenges like competition, market saturation, and technological changes cause things to slow down. And investors shouldn't expect Nvidia to be an exception to this rule. There are already some early signs that the company's boom is starting to plateau.
Nvidia's second quarter highlights the changing narrative. While revenue jumped an impressive 56% year over year to $46.74 billion, this is a sharp deceleration from the prior-year period, when revenue grew by a whopping 122%. There are several reasons behind this slowdown. The biggest (and least alarming) factor is that comparisons are getting more difficult. Even if a company's total sales continue growing by a similar amount, the percentage change will naturally decrease over time.
Competition is also beginning to pick up. While Nvidia has so far managed to keep rival chip specialists like Advanced Micro Devices at bay, its biggest challenge may come from its own clients, which are eager to diversify their supply chains and reduce their reliance on its hardware.
Cloud computing giants Google, Amazon, and Microsoft all invested in their own in-house chip design, which they use alongside Nvidia hardware. However, the bigger threat could come from custom AI chips, optimized to work best with specific workloads, making them better suited and cheaper than Nvidia's general-purpose solutions. Reuters reports that ChatGPT maker OpenAI expects to launch its first custom AI chip in 2026 with the help of manufacturing partner Broadcom -- potentially reducing its need for Nvidia's hardware.
Is the AI industry a giant bubble?
Even in the best-case scenario, Nvidia will face long-term challenges as its clients aim to vertically integrate their AI supply chains. But that's assuming AI demand remains robust, which is far from guaranteed. Early cracks are beginning to form in the industry's growth narrative.
In August, researchers from the Massachusetts Institute of Technology released a study that suggests 95% of generative AI pilots failed to create meaningful value for corporations. These disappointing numbers may be due to the technology's current limitations -- as of July, the best AI products can complete only 30% of real-world office tasks, with the majority performing significantly worse, according to Futurism magazine.
Image source: Getty Images.
Investors should expect the performance of AI tools to improve over time as hardware gets better and AI engineers work out the kinks. That said, money talks. And if corporations do not quickly see a meaningful return on their AI investments, they may reduce their software spending.
Nvidia operates on the pick-and-shovel side of the generative AI industry, which means it is somewhat insulated from corporate software demand. But it is not immune. If companies stop demanding AI solutions, it could eventually cause cloud computing giants to reevaluate their current spending levels on hardware. This is a significant potential threat for Nvidia because it earned around 88% of its second-quarter revenue from its data center segment, which is dominated by its sales of advanced chips for generative AI.
Is Nvidia still a millionaire-maker stock?
While Nvidia may manage to overcome its near-term challenges and create value for investors, its days of explosive growth seem over. That means this $4.1 trillion company is unlikely to turn you into a millionaire unless you already have a massive chunk of cash to invest.
