Will Nvidia’s growth rate keep slowing down? If so, investors may be wise to take their profits. However, if the AI chip designer’s new products spur faster growth, now might be a buying opportunity.
Stock prices rise when companies exceed investor expectations and raise guidance and they drop if companies fall short on either one. Nvidia is no exception to this rule.
To justify buying Nvidia stock now that it’s the most valuable company in the world — having enjoyed a 195% rise in its share price to a market capitalization of $3.5 trillion this year — you must believe the company will keep beating and raising.
If Nvidia significantly exceeds conservative growth targets with help from Blackwell, the stock could rise despite slowing revenue growth, dependence on a few large customers, and the absence of a killer app to deliver a return on the rising investment needed to train and operate AI chatbots.
Reasons Nvidia Stock Could Drop
Nvidia stock presents investors with significant risks. These include the following:
- Revenue growth slowing down. Nvidia’s revenues grew in a range of 206% to 265% during Q4 2023, Q1 2024, and Q2 2024. Nvidia’s 94% revenue growth in the third quarter was still very rapid — but considerably slower than in previous quarters. Nvidia’s forecast of 70% growth in Q4 is a continuation of this deceleration trend, according to my November Forbes post.
- Dependence on small number of large customers. Nvidia has three key accounts — each of which contribute more than 10% of the company’s total revenue, according to Social Press Blog. In the first nine months of 2024, these unnamed key accounts individually bought between $10 billion and $11 billion worth of goods and services from Nvidia, according to its latest quarterly filing with the SEC. These customers could be Microsoft, Meta Platforms, and SuperMicro, according to Bloomberg Intelligence global head of technology research Mandeep Singh. If Singh is correct, SuperMicro’s delayed financial statements could pose a risk to Nvidia investors.
- Growing investment required to sustain generative AI. Investments to build generative AI — including data centers, chips, software, electricity, and water could top $1 trillion by 2030, according to Goldman Sachs. To power their processing chips and cool the heat they emit, AI computer centers will continue to consume enormous amounts of electricity and water — rising from a range of 3% to 4% of the nation’s total in 2024 to “between 11% and 12% in 2030,” reported the Wall Street Journal. Unless that investment yields faster revenue growth or much lower costs, companies could ultimately cut back — which could crimp Nvidia’s growth.
- Absence of a generative AI killer app that could yield high return on investment. A killer app for generative AI that yields a high ROI remains elusive. Most people using generative AI are doing it to help them overcome, say, writer’s block as they compose an email, according to the Boston Globe. A small number of companies are using AI to boost the productivity of business processes such as sales, customer service, and coding. While companies are seeking generative AI applications that produce faster growth, they are more concept than reality. If such a killer app does not emerge, companies will cut back on investing in generative AI — which could hurt Nvidia’s growth.
Reasons Nvidia Stock Could Keep Going Up
My guess is investors are baking all these negatives into their expectations. Indeed, despite Nvidia’s slowing growth in 2024, the company’s stock has continued to rise. This could be because the company has been doing a good job of lowering investors’ growth expectations.
Positive surprises to growth would keep Nvidia stock rising. Huge orders for the company’s latest chip line by the largest AI service providers — coupled with growing corporate interest in applying AI to make processes more efficient — could provide investors with unexpected good news. Here’s how:
- Big Blackwell orders ahead. Blackwell chips are expected to generate $13 billion in Q4 2024 revenue for Nvidia. These chips are more energy efficient and faster then the company’s previous high-end chips — “about 25 times as energy efficient,” noted the Journal with 30 times faster processing speed, Forbes reported.
- Rise of Nvidia super clusters. The largest AI service providers are building multi-billion dollar super clusters of computer servers that “contain unprecedented numbers of Nvidia’s most advanced chips,” according to the Wall Street Journal. For example, in 2024 Elon Musk’s xAI built Colossus — a supercomputer in Memphis — with 100,000 Nvidia Hopper AI chips. By next summer, xAI could host a super cluster with 300,000 Blackwell chips, according to the Journal. At $30,000 per chip, Musk’s $9 billion worth of Blackwell chips could offer upside surprise for Nvidia investors.
- Increased CEO talk about generative AI applications in Q3 2024. In Q3 2024, CEOs discussed using AI and automation to streamline processes at a higher rate than quarters before, according to IOT Analytics. Some of the key AI-related use cases included process automation (up 59% since Q2), digital twin (up 35%); and conversational AI (+28.6%). While it remains to be seen whether this talk will translate into faster growth, it could lead to a killer app for AI which would benefit Nvidia.
Until Nvidia can unlock faster-than-expected growth, its stock could be stuck in a trading range.
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