Nvidia's $3 trillion rally is on the brink, Wall Street is unsettled.

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(Bloomberg) — In the two years since ChatGPT helped spark the AI frenzy, Nvidia Corp. $3 trillion in market capitalization. But the landscape is now changing for the chipmaker.

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Competitors and customers are intensifying efforts to grab a bigger piece of the artificial intelligence chip market. The revenue growth in the sector is slowing down. The Biden White House is seeking to limit foreign sales of Nvidia’s most advanced chips, though it’s unclear how President-elect Donald Trump’s incoming administration will handle this.

Does it sound scary? None of these risks should deter investors from betting that Nvidia’s lineup could add billions of dollars in market value by 2025 as the flood of spending on AI computing gathers steam.

“I’m not concerned that we’re at the top in Nvidia,” said Kevin Mahon, chief investment officer at Henion & Walsh Asset Management. Although we need to see more flexibility, there is more growth. The AI revolution is going to be a long road with many potholes.

That turmoil has been on display recently, with Nvidia shares falling after a presentation by CEO Jensen Huang drew high expectations from investors. In the year As of Tuesday’s close, the stock has fallen for five-straight sessions, shedding 12% since hitting a record on Jan. 6. It rose 1.7% on Wednesday.

Investors say these kinds of swings come with the territory.

“Nvidia stock is always going to be more volatile than the market,” said Joanne Feeney, a portfolio manager and partner at Advisory Capital Management, who raised her price target on the shares earlier this week. “We see it as having good average earnings growth over many years, and we see that as clarifying and maintaining the valuation.”

According to the average price target compiled by Bloomberg, Nvidia shares are expected to rise about 30% in the coming year. That would give the chipmaker a market value of more than $4 trillion, potentially dwarfing its closest peers Apple Inc. and Microsoft Corp. Revenue is expected to reach $129 billion in the current fiscal year, ending Jan. 30, up from $27 billion. Two years ago.

That said, there are many potential risks ahead. Here are the big issues facing Nvidia next year:

The cost of AI

Nvidia’s lineup ultimately depends on demand for AI services. Nearly half of that revenue comes from a handful of tech giants rushing to add computing power. Microsoft, Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc. Capital expenditures are expected to total $257 billion in fiscal year 2024, up from $209 billion. And customers aren’t generating the big sales they expect from AI.

“At some point we’re going to have to see new applications for this investment to continue,” said Gil Luria, head of technology research at DA Davidson and one of eight of 78 analysts tracked by Bloomberg. He does not have a buy rating on the stock.

Outside of hardware makers like Nvidia, the most visible AI revenue growth is coming from big web service providers like Amazon, Google Cloud, and Microsoft’s Azure. However, compared to the costs the companies spend on the development of the technology, it is still relatively small.

So far, few of the tech giants’ cloud computing customers are seeing significant revenue growth from AI. Salesforce.com Inc. Shares have risen on high hopes for new AI offerings, but the customer relationship management software company hasn’t seen much of an increase in sales yet. Palantir Technologies Inc., which makes data analysis software. It said its AI services are driving revenue growth.

“It’s critical that hyperscaler customers start generating meaningful returns,” Luria said.

Competition

Nvidia has a virtual monopoly on AI accelerators and is trying to stay ahead of the competition by accelerating the pace of developing new lines of chips. The latest, Blackwell, faced manufacturing challenges that initially slowed the pace of the release. But Huang said it is now in full production and will begin shipping in the current quarter, adding that Blackwell demand is “very strong” and expected to outstrip supply for several quarters.

Advanced Micro Devices Inc. It’s probably Nvidia’s closest competitor. But AIA’s accelerated sales of more than $5 billion in 2024 are a fraction of the $114 billion in data center revenue that Nvidia expects this fiscal year. Intel Corp., which is in the middle of a difficult turnaround, said the company will miss its target of $500 million for 2024 as orders for AIA accelerators are weaker than expected.

Meanwhile, chipmakers Broadcom Inc. and Marvell Technologies Inc. are gathering momentum in sales of custom semiconductors and networking components used in data centers. Broadcom forecast in December that the market for AI components would reach $90 billion by 2027, boosting its shares and raising concerns that ASIC chips could take away share from Nvidia.

But, according to Morgan Stanley analysts led by Joseph Moore, those custom chips are unlikely to hurt Nvidia given Blackwell’s significant technological advances.

“Competing directly with Nvidia on cluster-level specs remains a challenge,” they wrote in December.

And then there are the chipmaker’s big customers, who are scrambling to develop their own semiconductors to avoid Nvidia’s high prices. Amazon has begun shipping the second generation of the Trennium, which plans to combine up to 100,000 chips together in clusters. Alphabet’s Google began building an AI chip more than a decade ago, and the latest version is expected to become widely available this year. Microsoft Corporation has announced an accelerator and central processing unit called Maia in late 2023.

Price

How much investors will pay for Nvidia stock will come down to growth prospects. As customers prepare to spend more on hardware and competition is still playing out, that outlook looks bright at the moment. The stock trades at about 31 times projected earnings over the next 12 months, lower than the average of 34 times over the past decade, according to data compiled by Bloomberg.

Still, that assessment calls for Nvidia’s profits to grow at a time when growth is slowing and higher costs associated with Blackwell development are expected to weigh on margins. Nvidia’s sales are expected to rise 112% in fiscal 2025, 53% in fiscal 2026 and 21% in fiscal 2027. Nvidia said in November. However, it expects margins to rebound as production increases.

Scott Yuschak, managing director of equity strategy at Truist Advisory Services, said that for a fast-growing company like Nvidia, it all adds up to affordability.

“There’s plenty of growth left for Nvidia in 2025 and there’s still reason to look for the stock,” Yuschak said. Again, this number depends on larger and larger costs. If there are signs of a slowdown in AI spending, the price investors are willing to pay for Nvidia shares will fall.

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