Over the past two years, no trend has generated more buzz on Wall Street than the rise of artificial intelligence (AI). The ability of AI-driven software and systems to become more proficient at assigned tasks and learn new skills over time without human intervention gives this technology seemingly limitless long-term potential. Masu.
In sizing the award, PwC analysts estimated that AI would increase global gross domestic product (GDP) by 26% ($15.7 trillion) by the turn of the decade. This increase in scale means that companies at the top and bottom of the AI industry can be winners.
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But no company has benefited more directly from the rise of AI than semiconductor giant Nvidia. (NASDAQ:NVDA). In less than two years, Nvidia has grown from a $360 billion business with some weight in the technology sector to the most valuable publicly traded company on Wall Street (with a market capitalization of $3.64 trillion).
Wall Street and investors will be watching closely on November 20 as Nvidia plays a key role in the AI revolution. On that day, the company puts on its proverbial mask and announces its results for the quarter ending October 27th.
While the optimism surrounding Nvidia is thick enough to cut with a knife, there are several reasons why NVIDIA stock could hit a brick wall on November 20th.
Before we dig deeper into why Nvidia’s stock is struggling after the release of its third-quarter earnings, I’d like to provide some background to explain why Nvidia has increased its market value by $3.3 trillion in less than two years.
Nvidia’s growth is centered around hardware. Orders for the company’s H100 graphics processing unit (GPU), commonly referred to as “Hopper,” and its successor, the Blackwell GPU architecture, are backlogged. Businesses are keen to gain first-mover advantage, and Nvidia’s AI-GPUs offer superior computing capabilities.
In addition to strong demand, Nvidia dominates the pricing power of its hardware. While competing AI GPUs range in price from $10,000 to $15,000, Hopper consistently hovers in the $30,000 to $40,000 per chip price range. Businesses willing to pay a premium for Nvidia’s solutions have driven the company’s gross margins to 78%.
I would be remiss if I didn’t also mention the important role that Nvidia’s CUDA software platform has played in driving sales growth. CUDA is a toolkit that developers use to build large language models and maximize the computing potential of GPUs. In other words, CUDA is a lure to keep Nvidia’s customers within its products and services.
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It’s no wonder that investors are flocking to the company, as it’s experiencing truly impressive sales growth, reaching $27 billion in 2023 and an estimated $180 billion in 2026.
But there are six reasons to believe the perfect storm is brewing for NVIDIA. NVIDIA will need nothing less than flawless execution to sustain its near-parabolic rise.
Image source: Getty Images.
When Nvidia releases its third-quarter results in the next four days, it will likely beat consensus estimates for revenue and profit. Over the past seven quarters, Nvidia has handily beat earnings per share (EPS) estimates. However, simply exceeding the company’s October forecast is unlikely to be enough to support further upside for a variety of reasons.
First, external competition has officially arrived. After securing an estimated 98% of data center GPU shipments in 2022 and 2023, NVIDIA is likely to cede some of that market share to Advanced Micro Devices this year, according to a TechInsights study. AMD is rapidly ramping up production of its MI300X AI-GPUs, and recently announced MI325X, which is expected to go into production by the end of the year. With Nvidia’s GPUs holding up and companies looking to gain first-mover advantage, it wouldn’t be surprising to see them pick up AMD’s AI hardware instead.
However, the bigger threat to Nvidia may simply be internal competition. Many of our top net sales customers, including Microsoft, Meta Platforms, Amazon, and Alphabet, develop AI chips in-house for use in their data centers. The development/manufacturing cost and ease of access of these internal chips could give them an advantage over Nvidia’s hardware in future quarters.
Nvidia’s gross profit expansion is likely to prove unsustainable as the GPU shortage decreases. NVDA Gross Margin (Quarterly) data by YCharts.
In addition to this second point, the AI-GPU shortage plays a key role in increasing Nvidia’s pricing power. As more chips become available and scarcity fades, Nvidia’s pricing power and gross margins will be negatively impacted.
The third issue to consider is that NVIDIA remains constrained by its supply chain. Taiwan Semiconductor Manufacturing Co., Ltd., which produces chips for Nvidia, aims to increase its chip-on-wafer-on-substrate (CoWoS) production capacity to 80,000 chips per month. CoWoS is required for high-bandwidth memory packaging in AI-powered data centers. Being at the mercy of suppliers means NVIDIA may not be able to fulfill all orders and may lose valuable data center real estate to external and internal competitors.
Fourth, there is little reason to rejoice over export controls. In 2022, US regulators cracked down on Nvidia’s ability to export AI-GPUs to China, the world’s second-largest economy by GDP. The following year, Nvidia’s toned-down AI chips A800 and H800, designed specifically for China, were also added to the export restriction list. With President-elect Donald Trump promising to get tougher on trade with China, Nvidia’s prospects for making big money exporting AI hardware to China are rapidly fading.
Insider sales will increase in 2024. NVDA Stock Sold by Insiders data by YCharts.
Insider trading activity provides the fifth puzzle piece of the perfect storm on November 20th. Over the past 47 months, not a single executive or director has purchased a single Nvidia stock on the open market. There are many reasons to sell a stock, not all of them nefarious, but the only reason to buy stock in a company is if you think the stock price will rise. It’s clear from the actions of Nvidia’s management and directors that Nvidia stock is not considered a good value.
The sixth and final reason I think Nvidia stock will hit a brick wall on November 20th is history. Over the past 30 years, investors have consistently overestimated how quickly new technologies and innovations will be commercialized and adopted. This leads to high growth expectations, but ultimately (keyword!) disappointment.
Despite the strong demand for Hopper and Blackwell, what Nvidia’s customers are largely lacking is a clear plan for monetizing their AI investments. In other words, companies are buying it, but there is no clear use case for it. All technologies take time to mature, but artificial intelligence is unlikely to become an exception to the unwritten rule. In my view, this leaves Nvidia stock in a precarious position as of November 20th.
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Sean Williams has held positions at Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
“Prediction: Nvidia stock will stall on November 20th” was originally published by The Motley Fool
