It's not easy to complain about Nvidia (NVDA +2.93%). Its shares have skyrocketed 13,440% in the past 10 years (as of July 29), even though they trade 19% off their peak. This business has created many millionaires.
Additionally, the company is operating at full strength. During its fiscal 2027 first quarter (ended April 26), it reported revenue growth of 85% year over year. Its net income surged 211%. This is a booming business.
However, this artificial intelligence (AI) stock faces one big risk. And it's something that nobody's really talking about right now.
Image source: The Motley Fool.
Will the AI spending boom slow down?
At the most fundamental level, Nvidia is thriving precisely because there's so much AI-related spending. The management team's commentary highlights how much money is flowing up the industry supply chain.
"With analysts now forecasting hyperscale capex to exceed $1 trillion in 2027 and agentic AI beginning to proliferate all industries, AI infrastructure spending is on track to reach $3 trillion to $4 trillion annually by the end of this decade," CFO Colette Kress said on the Q1 2027 earnings call.
It's hard to wrap your head around these figures. We're talking about trillions of dollars here. The scale of this AI cycle is unlike anything the world has ever seen.
But what if all this spending slows down? It's the most important unanswered question facing the economy right now. That's not an exaggeration.
Federal Reserve Board economists estimate that more than one-third of U.S. GDP growth in the first quarter was attributed to AI spending. And if Kress' forecast comes true, the $3.5 trillion (at the midpoint) spent in 2030 will represent a higher share of the nation's GDP than any previous capex build-out in history, exceeding the 1880s railroad boom.
The sustainability of this is the biggest unknown for Nvidia. If there's no longer a need for the picks and shovels powering the AI trade (the company's incredible data center graphics processing units), what happens to the one selling the most and best picks and shovels?
The endgame of AI is uncertain. No one knows what new businesses, products, and services will be enabled by this technology. But Nvidia's success rests on AI creating enormous value sooner rather than later. The end users of AI, mostly enterprises, will need to evolve from experimentation to outsize revenue growth or margin expansion.
Time will tell what happens.
NASDAQ: NVDA
Key Data Points
Something has to give
From today's point of view, there are two possible outcomes.
On one side, the chip-buying hyperscalers will be able to flatten (and maybe reduce) their capital expenditures in the coming years. Then, they would return to durable free-cash-flow growth.
If this happens, companies that sell to them, like Nvidia and other chip stocks, will suffer.
Another scenario is that the hyperscalers keep spending like there's no tomorrow. Consequently, Nvidia will continue to gain financially.
It doesn't seem plausible for both of these situations to simultaneously stay true forever. Something has to give. For Nvidia, substantial revenue and market capitalization are on the line.
