Nvidia (NASDAQ:NVDA) is one of the hottest stocks of the past year, riding high on the artificial intelligence hype cycle. However, the chipmaker’s shares lost their luster in recent weeks, plunging 15% from its peak in June. This pullback occurred even without Nvidia posting any concerning financial results.
As a semiconductor company, Nvidia stock is naturally volatile and underperforming during broader market downturns. And I believe shares will fall further in the near term if the current bearish sentiment persists. The risks of a continued sell-off outweigh the potential for upside. Let’s dig deeper into why.
Is Nvidia’s AI Dominance Under Threat?
Nvidia is the current leader in providing the advanced graphics processing units (GPUs) that power AI applications. In its latest quarter, Nvidia posted record revenue of $13.5 billion, up 101% year-over-year, driven by surging demand for its AI chips. The company’s Data Center segment, which includes AI chip sales, saw revenue skyrocket 171% to $10.3 billion.
However, as the artificial intelligence arms race heats up, Nvidia faces rising competition from its own big tech customers. Companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Meta Platforms (NASDAQ:META) are among Nvidia’s largest buyers of AI chips today. However, they are also investing heavily in developing their in-house AI hardware.
Nvidia’s problem is that it charges an extremely high premium for its cutting-edge AI chips. For large tech firms with deep pockets and vast engineering resources, it increasingly makes financial sense to design custom AI silicon rather than pay Nvidia’s markup. This “frenemy” dynamic poses a major long-term risk to Nvidia that the market underestimates.
We’re already seeing the first signs of this threat. Apple started using custom AI chips in products like the Vision Pro headset. A recent report indicated Apple managed to train its latest AI models using Alphabet’s TPU chips rather than Nvidia GPUs. If this trend continues, Nvidia’s growth trajectory could slow down.
Near-Term Caution Is Warranted
To be clear, I’m not arguing that Nvidia’s business is in trouble or that its long-term prospects are dim. The company has a substantial lead in AI hardware that won’t evaporate overnight. And it continues to innovate rapidly, with its next-gen Blackwell architecture set to launch later this year and drive further performance gains.
Even after the recent pullback, Nvidia trades at a premium valuation of around 38x forward earnings. That’s lofty but not outrageous in the context of Nvidia’s projected growth. Analysts expect Nvidia’s revenue to surge 97.5% year-over-year to $120.3 billion in the current fiscal year.
However, in the near term, I believe the risks outweigh the potential rewards for new investors. The tech sector remains under pressure amid higher interest rates and slower economic growth. Until there are signs of a sentiment shift, high-flying stocks like Nvidia will likely remain out of favor.
At the same time, Nvidia’s increasing reliance on the volatile cryptocurrency market for GPU demand introduces added unpredictability. With crypto prices stagnant and mining profitability down, a slowdown in that segment could weigh on results.
The Bottom Line
I’ve been cautioning for a while now that Nvidia stock has been a momentum-driven trade detached from fundamentals. The company’s long-term future is bright, but in the near term, shares will be at the mercy of market sentiment and economic conditions.
For investors who have ridden Nvidia to big gains over the past year, now is prudent to take some chips off the table. And for those considering establishing a new position, I’d advise waiting for a better entry point. A lot of optimism is still priced in.
Of course, trying to time the market is a fool’s errand. Nvidia could rebound if it delivers another set of blowout results next month. However, in my view, the wiser move is to err on the side of caution. Until the dust settles, I’m rating Nvidia stock a “sell.”
On the date of publication, Omor Ibne Ehsan 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.
On the date of publication, the responsible editor held a LONG position in NVDA, AAPL and AMZN.