Even if Nvidia maintains its GPU competitive advantage with Stock-Split, its shareholders could be in for an unpleasant surprise

About three decades ago, the advent of the Internet changed the growth trajectory for corporate America. Since then, many new technologies, innovations and other big trends have come promising to be the best thing since sliced ​​bread. However, none have been able to match the game-changing potential that connecting the world via the Internet brought to the table… until now.

The advent of artificial intelligence (AI) opens an unlimited number of doors in almost every sector and industry. When we discuss “AI”, I’m talking about the use of software and systems for tasks that would normally be supervised or undertaken by humans. Giving software and systems the ability to learn and evolve over time without human intervention is what gives AI such widespread utility.

Based on a report published last year by analysts at PwC, AI could add an estimated $15.7 trillion to the global economy by the end of the decade. That’s a lot of money and a big enough pie to allow for multiple winners.

But for now, no company has been a bigger AI winner than semiconductors Nvidia (NVDA 1.75%).

Nvidia has captured its competitive advantages in a much-needed stock split

In short, Nvidia’s graphics processing units (GPUs) have become the standard in high-computing data centers. According to a study conducted by semiconductor analysis company TechInsights, Nvidia was responsible for shipping 3.76 million of the 3.85 million GPUs for AI-accelerated data centers in 2023. That’s a good 98% market share and it actually borders on a monopoly.

There is absolutely no doubt that AI-driven businesses want Nvidia GPUs in their data centers to help train large linguistic models (LLMs) and oversee generative AI solutions. This is clearly evident when you consider that about 40% of Nvidia’s net sales are derived from members of the Magnificent Seven. Microsoft, Meta Platforms, AmazonAND Alphabet. During Meta’s first quarter, the company announced plans to increase capital spending, with the express idea of ​​fulfilling its artificial intelligence ambitions.

Having the first mover advantage has also fueled Nvidia’s pricing power. Demand for the company’s H100 GPU has completely outstripped its ability to fulfill orders. Also with Semiconductor manufacturing in Taiwan increasing its chip-to-wafer-to-substrate capacity, Nvidia cannot please all of its customers. As a result, it was possible dramatically increased selling price on its GPUs, which led to a hot gross margin of 78.4% during the fiscal first quarter (ended April 28).

Nvidia’s major strengths in AI-accelerated data centers, along with the mountain of cash flow it’s generating from its high-priced H100 GPUs, are also helping to support continued innovation. In March, the company unveiled its Blackwell GPU architecture, which is designed to further accelerate computing capacity in data processing, quantum computing and generative AI.

Earlier this month, CEO Jensen Huang unveiled Nvidia’s newest AI architecture, which is called “Rubin.” Rubin will help train LLMs and operate on a new central processor known as “Vera.” While the Blackwell is expected to reach customers later this year, the Rubin won’t make its official debut on a commercial scale until 2026.

This combination of innovation, first-mover advantage, and otherworldly pricing power has seen Nvidia’s stock price rise more than 700% since the start of 2023. With the company’s stock recently trading above 1,000 dollars per share, its board of directors approved and executed a 10-for-1 stock split. Nvidia joined more than half a dozen other high-flying companies in conducting a stock split in 2024.

On paper, you couldn’t ask for a more perfect sales growth than what Nvidia has delivered. But when things seem too good to be true on Wall Street, they almost always are.

Even if Nvidia maintains its computing advantages, shareholders could still lose out

As an investor, you should look for businesses that have well-defined competitive advantages, if not impenetrable moats. At the very least, Nvidia accounting for 98% of AI-GPUs shipped through 2023 puts it in the former category.

But even if Nvidia maintains its GPU competitive advantage, it may not be enough to keep its stock from eventually falling.

For example, it’s well documented that Nvidia will face its first real bout of outside competition from companies like Intel (INTC -0.03%) AND Advanced Micro Devices (AMD -0.17%). Intel’s AI-accelerating Gaudi 3 chip will be widely shipped to customers during the third quarter. Intel claims the Gaudi 3 has inference and power efficiency advantages over Nvidia’s H100.

Meanwhile, AMD is ramping up production of its AI-GPU MI300X, which is designed as a direct competitor to Nvidia’s highly successful H100. The MI300X is superior to the Nvidia H100 in memory-intensive tasks such as simulations.

Even if Blackwell and Rubin ultimately blow Intel and AMD’s chips out of the proverbial water based on compute capacity, the lack of GPUs suggests that Intel and AMD could still be big winners. A significant number of Nvidia chips should roll out the red carpet for outside competitors like Intel and AMD.

And it’s not just outside competitors that are a potential problem for Nvidia. The company’s aforementioned major customers, which account for about 40% of its sales, are all developing AI-GPUs in-house for their data centers. This includes Microsoft’s Azure Maia 100 chip, Alphabet’s Trillium chip, Amazon’s Trainium2 chip, and the Meta Training and Inference Accelerator (MTIA) from Meta Social Platforms.

Are these AI chips currently a threat to Nvidia’s computing edge? No. But their mere presence as a complement to the H100 GPU takes away valuable data center “real estate” and signals that Nvidia’s core customers are deliberately reducing their reliance on the AI ​​base.

With more AI-GPUs becoming available from Intel and AMD, and many of the Magnificent Seven chips developing AI in-house, the GPU shortage that has lifted Nvidia’s pricing power into the stratosphere will fade. The company’s adjusted gross margin forecast of 75.5% (+/- 50 basis points) for the fiscal second quarter — down 235 to 335 basis points from the following quarter — likely signals that these pressures are continuing.

NVDA Gross Profit Margin data (quarterly) according to YCharts.

Furthermore, every major technology, innovation, or other trend over the past three decades has undergone an early bubble-bursting event. Investors have consistently overestimated how quickly a new technology, innovation or trend would be adopted by businesses and/or consumers.

Although AI looks like the second coming of the Internet in terms of changing the arc of growth for corporate America, most businesses do not have well-defined game plans for how they will use the technology to improve sales and profits. We see this overzealousness repeated cycle after cycle with future major investments.

Mind you, that doesn’t mean Nvidia won’t be hugely successful in the long run or that its stock can’t continue to grow in value when looking back 10 or 20 years from now. But it suggests that, even if Nvidia maintains its GPU competitive edge, the immaturity of the technology in its early stages has Wall Street set up for another bubble.

The leader of every other major innovation for three decades has seen its share price eventually drop by at least 50%. I believe Nvidia shareholders are on track to suffer the same disappointment.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Intel and Meta platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.