Nvidia: Bright Future or Growing Risk?

When one hears the keyword "semiconductor," one inevitably thinks of Nvidia. And rightly so, as the company has increased its revenue and free cash flow by nearly 900% and 800%, respectively, over the past five years. With such growth, it is not surprising that industry analysts estimate Nvidia holds at least an 80% market share in the artificial intelligence chip sector. Unquestionably, Nvidia seems unstoppable. But could this growth come to a sudden halt? A look at the second quarter of fiscal year 2025 paints an interesting picture: nearly half of the quarterly revenue of $30 billion comes from just four customers. Such customer concentration can signify a significant growth dependency on a few players. Historical data also confirms this pattern. In the first quarter, 24% of revenue was attributed to two direct and two indirect customers. In fiscal year 2024, a single customer accounted for as much as 13% of total revenue. In comparison, there were no customers contributing 10% or more to total revenue in fiscal years 2023 or 2022. Particularly concerning is the identity of these large clients. Members of the "Magnificent Seven" like Meta and Tesla purchase Nvidia’s highly sought-after H100 graphics processors. However, there are indications that these companies aim to reduce their dependence on Nvidia. Tesla might build future competition, while Meta is developing its own chip, and Amazon is also investing in its own solutions. While competition alone does not pose an existential threat to Nvidia, it could lead to a loss of pricing power. This could signify that the era of triple-digit growth rates might soon come to an end, even if Nvidia continues to generate solid earnings. Motley Fool analysts recently released their top 10 stocks for investors, and Nvidia was not among them. Similar recommendations have yielded notable returns in the past.