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Is the bloom finally fading from this artificial intelligence (AI) rose? Shares of Nvidia stock (NASDAQ:NVDA) are down 10% from the all-time high they hit at the end of last month. Although the stock is still up 76% year-to-date, an incredible run after last year’s phenomenal high, investors are right to question whether this is the point where the AI chipmaker’s rocket begins to stall.
It wouldn’t be a problem with Nvidia stock itself. The market as a whole is having a tougher time in April. All the major stock indexes are lower over the past three weeks as inflation picks up steam again. It raises doubts about when (or if) the Federal Reserve will cut interest rates. Fed chairman Jay Powell just intoned, “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.” Analysts now say don’t expect a rate cut until December at the earliest.
That could be tough on business spending. They may begin reining in previous plans for expansion. How that impacts plans for AI’s growth going forward remains to be seen but it’s easy to see why investors may be concerned about Nvidia stock.
Full speed ahead
Investors need to separate Nvidia’s business from its stock. The chipmaker’s business is fine. As CEO Jensen Huang told analysts, all aspects of its business “are all growth engines in full throttle.” The CFO also said the AI wave is just beginning to sweep over the enterprise market, which is why the interest rate environment is key.
Earnings season for the second quarter is just getting under way. Keeping an eye on how those reports come in will be a signal as to whether growth will continue. Yet we also need to be mindful that a lot of this chip inventory has already been spoken for.
Micron Technology (NYSE:MU), which is making high-bandwidth memory for data centers to help meet their AI needs, says all of its 2024 inventory is already sold and most of 2025’s is gone too. Nvidia is undoubtedly in a similar situation. Any slowdown that occurs likely won’t appear for many months down the road. Orders can be cancelled, of course, but those are the sorts of warnings we’ll be alerted to as the year progresses should they even materialize.
An increasingly crowded field
Yet investors can’t ignore Nvidia’s valuation. When the market was all agog with growth, Nvidia stock trading at 70 times earnings and 30 times sales was acceptable. But with the Fed actively trying to throw the economy into reverse such lofty valuations might not set well.
Nvidia is facing increased competition from Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC), both of which recently introduced new, more powerful AI chips of their own. Even Nvidia’s own customers don’t want to be so reliant upon the chipmaker for the AI semiconductor needs.
Alphabet‘s (NASDAQ:GOOG), NASDAQ:GOOGL) Google recently developed the Axion chip, which it maintains is not a competitor to Nvidia and only seeks to grow “the size of the pie.”Amazon (NASDAQ:AMZN) recently built its Trainium and Inferentia chips, though the e-commerce giant also extended its partnership with Nvidia. Amazon Web Services was the first outfit to run the chipmaker’s GH200 Grace Hopper multi-chip product. However, Microsoft (NASDAQ:MSFT) has also developed its own AI chip. The need for quite so many Nvidia chips might not be as pressing.
Prepare for the worst, hope for the best
The immediate future for Nvidia stock still looks quite hopeful, despite macroeconomic concerns and more competition. It’s going to take a while for those factors to catchup with the semiconductor stock’s massive lead in the space..
Still, investors should probably begin thinking about the inevitable. No stock can grow to infinity. Although Nvidia stock has looked like it could for some time, these pressures that are only starting to percolate from below may bubble to the surface. And at NVDA stock’s lofty valuations looking for a soft landing pad may not be a bad idea.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.
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