Nvidia has long been a prominent player, particularly in the field of graphics processing units (GPUs). However, as we look forward to 2024, the landscape appears to be filled with challenges and uncertainties for this renowned chipmaker. So, is it too late to buy the stock?
Let’s delve into the factors that could potentially hinder Nvidia’s performance in the upcoming year, taking some notes from the insights shared by The Motley Fool.
The High Stakes of AI: A Multitrillion-Dollar Opportunity
Artificial intelligence (AI) has been touted as the next big thing, with predictions of adding a staggering $15.7 trillion to the global economy by 2030 based on PricewaterhouseCoopers (PWC). This transformative technology is driven by machine learning, enabling systems to learn and improve their tasks over time, opening up opportunities across industries.
Nvidia’s Remarkable Rise
Amidst the AI revolution, Nvidia initially appeared to be riding a wave of success. Analysts had anticipated high-single-digit sales growth for the company in 2024.
After just two quarters, however, their projections took a dramatic turn, with estimates now standing at an astonishing 103% sales growth. The company’s data center revenue, fueled by the success of its A100 and H100 GPUs in high-compute data centers, played a pivotal role in this surge.
Supply Chain Constraints Easing: A Double-Edged Sword
While Nvidia basks in the glory of soaring sales, there’s a peculiar irony lurking on the horizon: AI GPU production expansion. One might wonder how success could beget trouble, but the answer lies in supply chain dynamics.
The company’s rapid growth had been partly fueled by a shortage of AI-accelerated GPUs, allowing them to exercise substantial pricing power. However, their dependence on the chip-fabrication giant, Taiwan Semiconductor Manufacturing Company (TSMC), has reached a bottleneck.
TSMC’s Capacity Conundrum
TSMC, responsible for manufacturing Nvidia’s GPUs, has faced a capacity crisis. Their chip-on-wafer-on-substrate (CoWoS) capacity has been fully utilized, primarily due to the increasing memory needs of AI-accelerated data centers.
Nvidia’s hands are essentially tied until TSMC can significantly increase CoWoS production. The good news is that TSMC is taking steps to address this issue, with plans to double CoWoS capacity by the end of 2024.
The Cost of Expansion
As Nvidia pushes for expanded production, it must grapple with higher costs—a natural consequence of increased output. However, the real challenge lies in the diminishing supply of their A100 and H100 GPUs.
This abundance will inevitably erode the tech giant’s pricing power, potentially causing a decline in its gross profit margin, which soared to 68.2% in the first half of fiscal 2024.
Competition on the Horizon
While Nvidia’s margins tighten, they must also contend with rising competition. Advanced Micro Devices (AMD) has unveiled its MI300X GPU, poised to compete with Nvidia’s A100 and H100 models. Meanwhile, Intel, a tech giant in its own right, plans to enter the arena with its Falcon Shores GPU in 2025.
Both companies boast deep pockets and a track record of innovation, adding to the pressure on Nvidia’s pricing power and profit margins in 2024.
Final Thoughts: Learning from the Lessons of the Past
Investors often expect perfection, and Nvidia’s valuation reflects these high expectations. However, history serves as a reminder that the path of next-gen innovations is rarely smooth. Over the past 30 years, every emerging trend initially sparked euphoria but later encountered setbacks.
From the internet to blockchain, these transformative technologies needed time to mature and fulfill their potential. It is prudent to remember that AI, despite its promise, may follow a similar trajectory.