The Number Changing My View on Nvidia Stock

After closely examining Nvidia's latest quarterly SEC filing, my perspective on the stock has shifted, leading me to alter my stance from buy to hold. Despite Nvidia's impressive performance, I have become increasingly concerned about its near-term future due to several factors.

Firstly, while Nvidia continues to dominate the artificial intelligence (AI) accelerator market and is investing heavily in research and development, it now trades at a valuation of just 28 times earnings, which is still considered reasonable when compared to the S&P 500's average P/E ratio of 27. Additionally, Nvidia has announced a plan to buy back $235 billion of its stock between now and January 2028, which could potentially outperform the market in the long run.

However, a key vulnerability lies in Nvidia's high dependence on a small number of customers, with five companies accounting for between 10% and 22% of its accounts receivable balance, totaling 70%. This concentration raises concerns, as one of these companies is likely to be OpenAI, which has been underperforming its financial expectations. Furthermore, larger hyperscalers such as Amazon have also taken on significant debt and are currently free cash flow negative, potentially limiting their spending and growth.

Considering the recent quarterly revenue of $178 billion, up 96% from the previous year, Nvidia's growth appears exceptionally strong in the short term. Analysts predict this growth will continue at high-double-digit percentages through the next fiscal year. Nevertheless, if one or more of Nvidia's top customers reduce or stop their purchases of its processors, its growth rate could slow significantly in the near term, or even decline.

Given the company's strong position in AI accelerators, low valuation, and efforts to reduce its share count, Nvidia remains well-positioned to benefit from growth. However, the risk of an AI bust, albeit temporary, could bring considerable uncertainty to Nvidia's stock price should these five customers slow their purchases. While Nvidia is poised for long-term success, investors should consider postponing further stock purchases for now due to the potential near-term slowdown in revenue growth.