Can Nvidia (NVDA) Prove it Doesn’t Live or Die by a Handful of Hyperscalers?

Investors' main concern over NVIDIA (NVDA) has been its concentration among a handful of hyperscalers, including Amazon, Google, Microsoft, Meta, and SpaceX, according to CNBC. To address this, the company began separating its data center revenue into hyperscalers, AI clouds, industrial, and enterprise (ACIE) in Q1. In the first quarter, the two segments were nearly equal, with hyperscalers at $37.9 billion and ACIE at $37.5 billion.

ACIE grew 31% YoY, outpacing the slower hyperscaler growth. CEO Jensen Huang explained that selling to hyperscalers was easier due to their smaller number, compared to the 250,000 other potential customers. Despite this concentration, Nvidia's actual results better than investors feared. Data Center revenue reached $89 billion, exceeding forecasts, while ACIE revenue surged 138%.

NVIDIA CFO Colette Kress noted that hyperscaler revenue more than doubled. Even though Nvidia's biggest customers are designing their own custom chips to reduce dependence on the company, the smaller, diversified ACIE segment is growing faster. However, hyperscalers are facing financial strain from AI buildouts, with free cash flow being consumed by capital expenditures.

If these companies cut back on spending, Nvidia's largest revenue source would be directly exposed. While the company's growing ACIE business offers a diversification story, its most concentrated clients still drive most sales. If Nvidia expands to smaller clients while tech giants continue to invest heavily in AI, it can mitigate risk without hindering growth.

Nonetheless, the threat of custom chips and sudden budget cuts from large buyers could still cause demand drops.