Nvidia Corporation (NASDAQ:NVDA) CEO and co-founder Jensen Huang does not get much media attention, especially compared to the leaders at companies like Facebook Inc (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN). But he should. NVDA stock now has a market value of $113 billion, which marks it as the No. 3 player in the global semiconductor business.
Huang’s bold vision has been to leverage graphics processing units (GPUs), which were originally focused on gaming, to capitalize on the mega opportunity of Artificial Intelligence (AI). The results have been significant. During the latest quarter, revenues jumped by 32% to $2.64 billion and earnings rose by 60% to $1.33-per-share.
Keep in mind that the AI megatrend is still in the early phases. According to IDC, the global spending on AI hardware and software technologies is expected to go from $12 billion in 2017 to a whopping $57.6 billion by 2021.
As I have written on InvestorPlace, I’ve been bullish on NVDA stock. Yet I still think it is important to recognize the risks, especially since the valuation has gotten to hefty levels. And, with most NVDA news being good, it does seem likely the shares are priced for perfection.
So let’s take a look at the potential issues for the NVDA stock price:
Issue No.1 for NVDA Stock: Managerial Bandwidth
Nvidia is a sprawling company. Besides gaming, there are segments for the datacenter, professional visualization and automotive. While all these are large opportunities, they are still rife with competitors and inherent complexities.
Basically, there is the possibility management bandwidth can get stretched. Granted, so far NVDA has done a pretty good job. But over time, it will probably get tougher and tougher.
A prime example of how things can go off the rails is Cisco Systems, Inc. (NASDAQ:CSCO). After the robust growth years of the 1990s, the company underwent an ambitious strategy of moving into a multitude of businesses. The result was that it stumbled hard.
Issue No.2 for NVDA Stock: Competition
AI is just too big to ignore. As a result, the competition is heating up in a big way. One indication of this has been the sweeping consolidation in the chip industry. For example, Intel Corporation (NASDAQ:INTC) has acquired Mobileye for $15 billion and Qualcomm, Inc. (NASDAQ:QCOM) is trying to purchase NXP Semiconductors NV (NASDAQ:NXPI) for $47 billion (which includes debt). Oh, and of course, Broadcom Ltd (NASDAQ:AVGO) recently made a $105 billion bid for QCOM!
It’s certainly a whirlwind right now. And it seems like the M&A wave will not end any time soon.
But other companies are developing their own AI chipsets, which could put a dent in NVDA’s progress. Just look at Advanced Micro Devices, Inc. (NASDAQ:AMD), which has developed various solutions but is also making inroads in the GPU gaming market. Something else: Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has been building its own AI chip, called the Tensor Processing Unit (TPU).
No doubt, the company has enormous resources, but it has also used its AI algorithms for properties like Maps, Photos, search and the Assistant. What’s more, GOOGL has the TensorFlow open source platform, which is rapidly becoming a standard in the industry.
Issue No.3 for NVDA Stock: Valuation
By any metric, NVDA stock is expensive, with the price-to-earnings multiple at 53X. Since early 2016, the shares have soared from $29 to $185.
In fact, there are already signs that investors are getting edging. Even though the markets have been in the bull run for the past weeks, NVDA stock has fallen 13% during this period. In other words, it would not be a surprise if there is continued profit-taking as investors attempt to protect their gains.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
