NvidiaS ‘ (NASDAQ: NVDA) Shares are up more than 600% over the past two years. Much of this rally was driven by the growth of the artificial intelligence (AI) market, which boosted sales of data center GPUs for processing complex AI tasks.
The market’s voracious demand for data center chips continues to outpace its available supply, and analysts expect Nvidia’s revenue to grow at a compound annual growth rate (CAGR) of 45% from fiscal 2024 to fiscal 2027 (which ends in January 2027). They expect its earnings per share (EPS) to grow at a CAGR of 51%.
So even though Nvidia is already worth more than $3 trillion, it may still have a lot of room to run. But before investors buy into this bullish stock, they should pay attention to these four red flags that could put an abrupt end to its historic rally.
1. It has become a comprehensive game on AI chips
In fiscal year 2022 (which ended in January 2022), Nvidia generated 46% of its revenue from its gaming GPUs, 39% from its data center GPUs, and the rest from professional visualization , auto and OEM chips. However, that product mix changed completely over the next two years as sales of its data center chips eclipsed its gaming chips.
In the first quarter of 2025, Nvidia generated 87% of its revenue from data center chips, 10% from gaming chips and the remaining 3% from its other categories. It generated $22.6 billion in data center revenue in that quarter alone compared to total revenue of nearly $27 billion for everything of fiscal year 2023. This formidable expansion transformed Nvidia from a more diversified GPU maker to an all-around player in AI chips.
That’s good if you believe Nvidia will continue to dominate the AI market as it expands. But if the AI market suddenly cools, Nvidia’s chip shortage could quickly become an oversupply. If its data center business takes off, it can’t fall back on growing its gaming segment and other smaller divisions to soften those year-over-year comparisons.
2. It faces unpredictable regulatory challenges
Nvidia’s overwhelming dependence on the AI market exposes it to many unpredictable regulatory challenges. US regulators have repeatedly tightened their export restrictions on shipments of its AI chips to China, and that pressure could prompt Chinese chipmakers to accelerate the development of their own AI chips.
Stronger regulations on AI-generating technologies, which have already come into force in Europe, could hamper the growth of the hot industry and prompt companies to curb their purchases of new AI chips. Complaints about mass plagiarism and other ethical issues may also force AI companies to expand at a slower, more measured pace.
3. Faces clear competitive threats
Nvidia controls 88% of the discrete GPU market, according to JPR, but its main rival AMD has released cheaper AI accelerators. AMD’s MI300 Instinct GPUs have already beaten Nvidia’s H100 GPUs — which cost about four times as much — in terms of raw processing power and memory usage in some industry benchmarks. Intel also recently claimed that its new Gaudi 3 AI accelerators are faster and more energy efficient than Nvidia’s H100 GPUs.
Super Micro Computer, which grew rapidly over the past few years by producing dedicated AI servers powered by Nvidia chips, has also developed new servers optimized for AMD and Intel’s cheaper AI accelerators. These cheaper servers could attract cost-conscious data center operators and erode Nvidia’s market share.
Meanwhile, Nvidia’s tight supply and high prices are driving its core customers — including OpenAI, Microsoft, AlphabetGoogle’s, and Amazon — to develop their own first-party AI accelerators. These chips won’t threaten Nvidia’s near-term growth, but they could gradually loosen its iron grip on the high-scale data center market.
4. Her underwear is a net seller
Nvidia stock isn’t cheap at 49 times forward earnings and 26 times this year’s sales. But if it had the potential to double or triple again in the near term, its valuations would look reasonable and its insiders should be piling up more shares.
However, over the past 12 months, Nvidia insiders sold more than 4 times as much stock as they bought. Over the past three months, they sold more than 52 times as many shares as they bought. This insider selling doesn’t necessarily mean its stock is headed off a cliff, but it’s a worrying trend that suggests its near-term upside is limited.
Is it still safe to buy Nvidia stock?
I believe Nvidia is still worth buying, but investors shouldn’t assume it’s a perfect growth stock. Its transformation from a gaming company to an AI company was unexpected and could experience significant growing pains over the next few years. But assuming it overcomes all those competitive, regulatory and macro challenges, it should remain one of the easiest ways to take advantage of the secular expansion of the AI market.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nvidia Is a Top AI Stock, But Don’t Ignore These 4 Red Flags was originally published by The Motley Fool
