As I expected, from Nvidia (NASDAQ: NVDA) rocket-ship rally is starting to stall, with shares down about 21% over the past 30 days. And while Nvidia is still a great company, the combination of a high valuation and low diversification leaves room for continued downside. Let’s investigate the impact of recession fears and fatigue due to artificial intelligence (AI) over the next three years.
Economic storm clouds to gather
It’s impossible to predict a recession with certainty, but data points to a potential slowdown in economic activity. In July, the U.S. added just 114,000 jobs, compared to expectations of 175,000, while the unemployment rate hit 4.3% — the highest level since 2021. And while the Federal Reserve is expected to stimulate growth by cutting interest rates, it may be too little, too late to prevent a so-called hard landing. Rate cuts can be a useful tool, but they can’t magically solve every problem in a faltering economy.
For Nvidia, a recession could be a disaster. Although the company dominated the AI industry by developing advanced graphic processing units (GPUs) needed to run and train these complex conversational algorithms, can not prevent its business model from being undermined by macroeconomic factors beyond its control.
Nvidia sells luxury Products
from Nvidia business has historically been cyclical. When money is tight, consumers are less likely to buy expensive computer upgrades, opting instead for cheaper second-hand options — or previous them altogether. While a shift to enterprise-level hardware protects Nvidia from the whims of PC gamers, a similar dynamic could also emerge in the AI chip market.
Analysts are starting to sound the alarm about the billions being spent on AI hardware with limited results on profits. Goldman Sachs analyst Jim Covello puts the situation in stark terms: “DDespite the high price tag, the technology is still far from where it should be to be useful. Things build over the world does not do what one takes advantage of, or is not yet ready for, usually ends badly.”
While tech companies are content to speculate on unprofitable AI investments when the economy is doing well, current spending levels can’t be sustained when conditions deteriorate. During recessions, companies typically shrink their non-essential and unprofitable segments first, and right now, AI seems to fit firmly into that troubled category.
Nvidia may be under-diversified
from Nvidia First-quarter revenue rose 262% to $26 billion, led by data center chip sales, which jumped an eye-popping 427% to $22.6 billion. But while this growth is impressive, it puts the most from Nvidia financial eggs in one basket. Data center sales now represent 87% of total revenue, driven by a few flagship products, such as the A100 and H200, which are typical large language models (LLMs) such as ChatGPT.
Other segments, such as gaming (10% of revenue) or professional visualization (2% of revenue), have become irrelevant in the current market, leaving Nvidia vulnerable to a potential decline in demand for AI accelerator chips.
Is Buying Nvidia Stock a Good Idea?
After rising more than 450% over the past three years, Nvidia stock has historically been a spectacular investment. And there’s still a lot to like about the company given its leadership in the global chip industry. That said, the stock appears to have peaked for now.
Immediately future price earnings ratio (P/E) multiple of 42, from Nvidia valuation prices into future growth that may not materialize, especially if the U.S. economy begins to slow and enterprise customers begin to reconsider their massive AI chip purchases. Nvidia appears overexposed to this vulnerable industry and could be a important correction in the coming years.
Should You Invest $1,000 in Nvidia Now?
Before you buy Nvidia stock, here are some things to consider:
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Where Will Nvidia Stock Be in 3 Years? was originally published by The Motley Fool