For a long time it seemed as though the Nvidia (NASDAQ:NVDA) share price just went up. But investors have started to become wary in the last month or so.
The latest issue for the company is a competing product from Alphabet that outdoes its chips in terms of power. So has the stock finally reached its peak?
Semiconductors
There are two major forces that have been weighing on Nvidia’s share price recently. The first is concerns about data centre growth and the second is the emergence of competitors.
In terms of AI growth, Nvidia has a number of orders from customers that aren’t doing hugely well financially. OpenAI is the most prominent example.
How long these companies can grow – or even maintain – their current spending remains to be seen. But it’s a genuine concern for investors at the moment.
The other issue is competition. News that Meta Platforms is considering using chips from Alphabet in its data centres means Nvidia suddenly doesn’t have the market to itself.
The big problem is that Alphabet’s TPUs are significantly more efficient than Nvidia’s GPUs in terms of power. But they aren’t as flexible and this presents a barrier to adoption.
I’ve been expecting a challenge for Nvidia as companies gradually begin to figure out the role AI might play in their businesses. But I didn’t expect it to come as soon as it has.
Growth prospects
At the start of the year, I outlined my view that Nvidia would underperform the S&P 500 in 2025. So far, I’ve been wrong – but every day the stock goes down, the gap is closing.
My thesis was largely based on declining growth rates. Put simply, I saw annual sales growth rates falling (admittedly from extremely high levels) and putting pressure on the share price.
Revenue growth rates have come down this year, but not as fast as I expected. Though part of this might be to do with some of the deals Nvidia has been doing with its customers.
It looks, however, as though Nvidia now has a real challenge on its hands. And it’s amplified by the high price-to-earnings (P/E) multiple the stock currently trades at.
That hasn’t mattered when the company was doubling its revenues every year and there seemed to be no competition in sight. But now things look a bit different.
The stock is now 17% off its all-time highs and investors are looking at how far it can fall, not how much higher it can go. And there are a few lessons to take from this.
Investing lessons
One of the lessons from the Nvidia story is the risks that come with a high P/E ratio. A high multiple means high expectations and this magnifies the force of bad news.
The most important, though, is probably that this industry is tough to understand properly. It takes a lot of specialist knowledge to assess a company’s competitive position accurately.
Given this, I think investors need to be very careful in this space. Right now, I think my prediction from the start of the year might just have been a fraction early.
