NVDA Stock Outlook: Will Nvidia’s Throne Wobble as Hungry Wolves Circle?

Stock Market

Nvidia (NASDAQ:NVDA) continues to deliver stellar financial results as it remains the runaway market leader in providing the chips that are used to produce artificial intelligence. Meanwhile, its valuation, based on analysts’ average forward estimates for the company, is not too demanding. As a result, I expect NVDA stock to climb significantly in the months and years ahead. However, I continue to believe that the company does face meaningful threats that could cause major downturns in Nvidia’s shares in the not-too-distant future.

Given these points, I recommend that investors looking for a name that will give them exposure to both the chip sector and the “Magnificent 7” buy a small amount of NVDA stock.

NVDA Delivered the Goods as It Remained the Top Dog in AI Chips

Last quarter, the chip maker’s top line soared 265% versus the same period a year earlier to $22 billion while its earnings per share, excluding certain items, jumped an incredible 486% year-over-year. Moreover, in the first quarter of this year, NVDA expects its revenue to rise to “$24 billion, plus or minus 2%.”

What’s more, according to Bank of America, in Q4, Nvidia sold a huge 95% of the graphics processing unit chips that are used to create AI. Also noteworthy is that Nvidia sold 900,000 such chips last quarter, representing a surge of over 100% versus the number of processors that it delivered to its customers in Q4 of 2022.

Nvidia Faces Meaningful Threats

Bank of America also noted that the number of GPUs sold by one of Nvidia’s competitors, AMD (NASDAQ:AMD), “more than tripled” in Q4 versus Q3. Meanwhile, as I’ve noted in past columns, Intel’s (NASDAQ:INTC) AI chips, known as Gaudi processors, appear to be becoming quite popular as the company reported that it had a backlog of over $2 billion for the chips as of the end of last year.

Given these rising competitive threats, the extremely high prices that Nvidia is charging for its AI chips are likely to drop sooner rather than later.

Meanwhile, gaming chips still generate a significant amount of Nvidia’s sales, as they accounted for $2.9 billion of its revenue last quarter. As a result, for those considering buying NVDA stock, it’s certainly worth noting that Electronic Arts (NASDAQ:EA), a prominent video-game maker, recently disclosed that it would lay off 5% of its workforce, cancel a Star Wars game that it had been developing and close “one of its game development studios.” Moreover, Microsoft (NASDAQ:MSFT), Sony (NYSE:SONY) and Tencent (OTCMKTS:TCEHY), have all slashed hundreds of roles at their respective video-game units in recent months.

In light of these developments, I believe that the demand for video games could be meaningfully dropping at this point. If that’s the case, the demand for Nvidia’s gaming chips could also drop significantly.

Also noteworthy is that several Nvidia’s large customers, including Amazon (NASDAQ:AMZN) and Microsoft, are developing their own AI chips. Over the longer term, these projects are likely to significantly weigh on the demand for and the prices of Nvidia’s GPUs.

Further, Nvidia’s gaming chips are also used to produce cryptocurrencies. While the value of cryptos has been climbing significantly in recent weeks, their prices have historically been quite volatile. As a result, I would not be surprised to see crypto prices drop a great deal at some point in the not-to-distant future. Such a phenomenon would probably cause a meaningful pullback by NVDA stock.

Valuation and the Bottom Line on NVDA Stock

Nvidia’s forward price-earnings ratio of 33.3 is not very high, given its tremendous growth and its high leverage to the AI boom. Still, given the significant threats that the firm is facing, I recommend that long-term investors limit their exposure to the shares to 5% or less.

On the date of publication, Larry Ramer held a long position in INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.

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