Anticipated Halt: Nvidia Shares May Experience a Setback on November 20th
For the past two years, no trend has sparked more excitement on Wall Street than the surge of artificial intelligence (AI). The capability of AI-driven software and systems to enhance their performance in assigned tasks and acquire new abilities without human assistance, coupled with the potential for continuous improvement, makes this technology appear almost boundless in its long-term prospects.
In their report "Sizing the Prize," analysts at PwC projected that AI would boost global gross domestic product (GDP) by 26% ($15.7 trillion) by the end of the decade. This substantial growth implies that companies across various sectors in the AI landscape can flourish.
However, no company has been more directly influenced by AI's rise than semiconductor titan Nvidia (NVDA -1.22%). In under two years, Nvidia, which was previously a $360 billion company with a notable presence in the tech industry, has transformed into the most valuable publicly traded corporation on Wall Street ($3.64 trillion market cap).
Given Nvidia's pivotal role in the AI revolution, Wall Street and investors are intently focused on Nov. 20. This is the date when the company will expose its financial data for the quarter ending on Oct. 27.
Although the enthusiasm for Nvidia is so intense it could be sliced with a knife, I'm able to provide six justifications why Nvidia's stock may stumble on Nov. 20.
Nvidia's growth trajectory has been textbook
Before delving into why Nvidia's stock may become stagnant following the release of its third-quarter fiscal results, here's some background to explain why Nvidia has added over $3.3 trillion in market value within just two years.
The driving force behind Nvidia's expansion is its hardware. Orders for the company's H100 graphics processing unit (GPU), commonly referred to as the "Hopper," and the subsequent Blackwell GPU architecture, are heavily backlogged. Businesses are eager to secure the competitive advantage and Nvidia's AI-GPUs offer superior computational capabilities.
In addition to robust demand, Nvidia is enjoying sky-high pricing power for its hardware. Whereas competing AI-GPUs are priced between $10,000 and $15,000, Nvidia's Hopper consistently commands prices of $30,000 to $40,000 per chip. Businesses willing to pay a premium for Nvidia's solutions have pushed its gross margin as high as 78%.
I'd be remiss if I failed to mention the significant role that Nvidia's CUDA software platform has played in spurring sales growth. CUDA is the toolkit developers use to build large-scale language models and maximize the computing potential of their GPUs. In essence, CUDA serves as the bait that keeps Nvidia's clients within its umbrella of products and services.
It's not surprising to see investors rushing in with such extraordinary sales growth — $27 billion in fiscal 2023 is projected to swell to an estimated $180 billion by fiscal 2026.
Nevertheless, there are six reasons to believe that a perfect storm is brewing for Nvidia, which will require near-flawless execution to sustain its near-parabolic ascent.
Opinion: Nvidia's party winds down on Nov. 20
When Nvidia announces its third-quarter operating results in just four days, there's a good chance it will surpass consensus revenue and profit forecasts. Over the past seven quarters, Nvidia has consistently outperformed earnings-per-share (EPS) expectations. However, simply outperforming expectations in its October quarter may not provide enough support for additional gains due to several reasons.
First and foremost, competitive pressure has officially materialized. After Nvidia secured an estimated 98% of GPU shipments to data centers in 2022 and 2023, based on TechInsights' research, it will likely concede some of this market share to Advanced Micro Devices this year. AMD is rapidly ramping up production of its MI300X AI-GPU, and recently unveiled the MI325X, which should go into production before the end of the year. Given the backlog for Nvidia's GPUs and businesses' desire for swift first-mover advantages, it would not be unexpected to see companies opt for AMD's AI hardware instead.
However, a greater threat to Nvidia might be coming from within. Its top clients — including Microsoft, Meta Platforms, Amazon, and Alphabet — are developing AI chips for usage in their data centers internally. The cost of developing and producing these internal chips, along with their accessibility, could make them more appealing than Nvidia's hardware in the near future.
To further this point, the scarcity of AI-GPUs has played a crucial role in increasing Nvidia's pricing power. As more chips become available and scarcity subsides, both Nvidia's pricing power and gross margin will be impacted negatively.
The third reason to consider is that Nvidia remains constrained by its supply chain. Taiwan Semiconductor Manufacturing, which produces chips for Nvidia, is aiming to increase its monthly CoWoS capacity to 80,000 wafers by the end of the year. CoWoS is essential for the packaging of high-bandwidth memory in AI-accelerated data centers. As a result, Nvidia remains at the mercy of its suppliers and may struggle to meet all its orders, potentially causing it to lose valuable data center real estate to external and internal competitors.
Fourthly, export restrictions bring no celebration. In 2022, American regulators restricted Nvidia's export of AI-GPUs to China, the world's second-largest economy by GDP. The next year, Nvidia's modified AI chips, the A800 and H800, intended for China, were also added to the export restriction list. With President-Elect Donald Trump vowing to be firm on China trade, Nvidia's hopes of earning substantial revenue from exporting AI hardware to China are rapidly fading.
Insider trading activities provide the fifth missing piece of the ideal scenario for Nov. 20. During the last 47 months, no executive or director has acquired a share of Nvidia stock on the open market. While there are numerous reasons to sell stock, not all of which are malicious, the only reason to purchase shares of a company is if one believes they'll increase in value. The actions of Nvidia's executives and directors suggest that they don't view Nvidia stock as a good investment.
Lastly, the sixth and final reason I anticipate Nvidia stock to encounter a stumbling block on Nov. 20 is history. Over the past three decades, investors have frequently overestimated the speed at which a new technology or innovation would become useful and/or widely adopted. This results in inflated growth predictions that ultimately fall short.
Despite robust demand for the Hopper and Blackwell, what is significantly absent from Nvidia's customers is a clear strategy to monetize their AI investments. In simpler terms, businesses are buying, but there's no evident use case. All technologies require time to evolve, and artificial intelligence is unlikely to defy the unspoken rule. In my opinion, this places Nvidia stock in a vulnerable position on Nov. 20.
After analyzing the text, here are two sentences that contain the words 'investing', 'finance', and 'money' and follow the context:
Investors are closely monitoring Nvidia's quarterly financial data, as increased competition and potential supply chain challenges could impact the company's future financial performance. The surge in AI-driven demand for Nvidia's hardware and software solutions has led to significant investments in their stock, making it one of the most valuable publicly traded corporations in finance.
