Management’s comments suggest that Nvidia’s revenue growth won’t continue forever.
NVIDIA (NVDA 4.55%) The company is one of the biggest beneficiaries of a surge in spending on artificial intelligence (AI). Its graphics processing units (GPUs) are key infrastructure for training and running large language models that are the backbone of generative AI. Big tech companies like Alphabet are (Google 1.17%) (Google 1.11%) and Meta Platform (Meta -0.74%) Now they’re spending billions to acquire as many Nvidia GPUs as possible.
This is great for NVIDIA and its shareholders — first-quarter sales more than tripled, and total revenue hit a record high of $26 billion — but this kind of growth can’t continue forever.
Analysts expect a more modest revenue growth rate of “just” 38.4% next year, but some comments from Nvidia’s major customers suggest that figure may be too high.
Image credit: Nvidia.
Nvidia’s biggest customer admits it’s overinvesting in AI
While Nvidia’s AI investments are helping to boost profits, the same isn’t necessarily true for many of its major customers: The increased capital spending required to build out AI data centers could strain cash flow, especially if those investments don’t have an immediate impact on revenue.
This poses a challenge for cloud providers that rent out computing infrastructure to developers. The big three cloud providers are Microsoft, Amazon, and Google. If a developer uses one of these providers and then needs access to computing power they don’t have, they end up using that provider’s competitors. As a result, with the current AI boom, providers need to build out data centers quickly to accommodate new customers as they come on board and existing customers ask for more capacity.
Alphabet CEO Sundar Pichai made this point clear when asked about AI investments during the company’s second-quarter earnings call. “My view is that as you go through this curve, the risk of underinvesting is significantly greater than the risk of overinvesting,” he told analysts. In other words, he’s currently intentionally overinvesting to acquire as many customers as possible. Microsoft and Amazon appear to be taking a similar approach.
Meanwhile, Meta Platforms is building its own data centers to support AI development: CEO Mark Zuckerberg has ambitions to make Meta the world’s leading AI company, and that means the infrastructure needs to be in place before the company’s software is ready to be trained and deployed.
“It’s hard to predict how this will pan out over the next few generations, but right now, given the long lead times to launch new infrastructure projects, I think it’s better to take the risk of building capacity before you need it than to be too late,” he said on Meta’s second-quarter earnings call.
His comments echo those of Pichai: Meta is investing now in hopes of maxing out capacity, but at some point it will right-size its data centers, at which point it will significantly slow its investments in servers and chips like Nvidia.
These comments will have big implications (on Nvidia’s income statement).
Nvidia shareholders should pay attention to everything Pichai, Zuckerberg and other executives at major tech companies say about AI spending because the company’s business is so concentrated among those customers.
Nvidia’s first-quarter total revenue came from just two customers, and 60% to 70% of the company’s revenue came from just 10 customers, according to Seligman Investments analyst Paul Wick.
With revenues so concentrated among a handful of customers, a single change in capital spending policy at one of them could dramatically impact NVIDIA’s performance. If Alphabet or Meta decided to cut spending a few years later after aggressively building capacity, NVIDIA’s growth would slow significantly.
The company’s stock is on a shaky footing, with NVIDIA stock trading at a valuation multiple of about 50 times expected earnings and 40 times enterprise value to sales. If it continues to beat management guidance and analyst expectations, the stock will continue to soar. But a poor quarter could send the stock plummeting. Alphabet and Meta’s comments suggest that it may only be a matter of time before AI spending plummets.
Randi Zuckerberg is a former director of market development and public relations for Facebook and the sister of Meta Platforms CEO Mark Zuckerberg. She is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool owns shares of and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
