Semiconductor specialist NVIDIA (NASDAQ:NVDA) It has emerged as the face of the artificial intelligence (AI) revolution. Over the past two years, the company has increased its market capitalization by trillions of dollars and is now the third most valuable company in the world, behind Apple and Microsoft.
But despite its meteoric rise to the top, some of the world’s largest hedge funds have recently sold NVIDIA stock. Two notable examples include Ken Griffin’s Citadel, which cut its stake in Nvidia by 79% last quarter, and DE Shaw, which cut its holdings by about half.
With AI being the next big frontier, isn’t it strange that prominent investors are selling Nvidia stock?
To be honest, maybe not. Below, we explore three areas where billionaires could be persuaded to cut their positions at NVIDIA while seeking growth in other areas.
1. How does competition affect Nvidia?
One of the most essential components for generative AI development is an advanced chipset called a graphics processing unit (GPU). Nvidia is currently the biggest company in the GPU swamp, but there’s another side to this growth story. This means that many other companies, including Microsoft, Amazon, Alphabet, Meta Platforms, and even Tesla, are developing their own AI infrastructure.
Many of these companies are already building their own custom chips. This could be a problem, as each of the big tech companies outlined above has long been rumored to be a major customer of Nvidia.
I’ll admit that using its own chips isn’t the end for Nvidia. These companies will likely remain customers and supplement their chips with Nvidia’s infrastructure.
That being said, I think Nvidia will gradually lose its dominant pricing power as the GPU market becomes more saturated. It will take years, but Nvidia could start to see revenue growth slow. I think it makes sense that Nvidia’s gross margins would shrink as sales start to slow. This can significantly reduce the company’s overall profitability.
For these reasons, I think more sophisticated investors are starting to realize that Nvidia’s ability to consistently generate record revenues and profits is shrinking.
2. Will the government come knocking?
Right now, Nvidia is well ahead of competitors like Advanced Micro Devices and Intel in the GPU space. Perhaps the strongest pillar of Nvidia’s fortress is the company’s tight integration of hardware and software.
Nvidia’s Compute Unified Device Architecture (CUDA) software layer sits on top of the company’s GPUs. It is very difficult for developers to mix and match chips from other companies with Nvidia’s CUDA. As a result, companies are choosing to fully train their AI protocols on Nvidia’s end-to-end product suite.
the story continues
This dynamic has given Nvidia an estimated 88% share of the GPU market. What’s even more surprising is that the company’s next-generation Blackwell GPUs, scheduled for release later this year, could easily help Nvidia gain further momentum and market share advantage.
This has played a big role in Nvidia’s current trajectory, but it could halt that momentum. why? Well, given Nvidia’s pseudo-monopoly, it’s entirely possible that the Department of Justice (DOJ) might investigate Nvidia’s business practices. As a result, Nvidia may be forced to moderate its ecosystem, which will impact the company’s growth.
3. Can lightning strike twice?
The graph below shows Nvidia’s stock price over the past two years. With more competition on the horizon and the possibility of government intervention, it’s hard to buy into the narrative that Nvidia stock will rise another 900% over the next two years. I don’t think the company has enough momentum to run at a reasonable pace over the next few years.
conclusion
There are a lot of unknowns about Nvidia and its future.
Will new chips from other ‘Magnificent Seven’ members be a detriment to Nvidia? Justice Department accuses Nvidia of self-dealing, exposing its products to make them more compatible with competitors’ chips Will the company be forced to do so?
What we can say with some confidence is that Nvidia stock is unlikely to become another multibagger anytime soon.
Given the uncertainty surrounding Nvidia, its competitive environment, and the overall strength of the AI market, we believe it is a prudent strategy to sell some stock and lock in profits while maintaining some internal allocation. Masu.
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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. 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. Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Adam Spatacco has held positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends Intel and recommends the following options: A January 2026 $395 long call on Microsoft, a January 2026 $405 short call on Microsoft, and a November 2024 $24 short call on Intel. The Motley Fool has a disclosure policy.
Should you follow these billionaires and exit your Nvidia stock? 3 Questions to Consider was originally published by The Motley Fool.
