Will NVIDIA Achieve Its Growth Forecasts?

NVIDIA, a key player in the AI revolution, designs the chips that power today's most advanced AI models. The company has been on a remarkable run, with its market value soaring to over $3 trillion — more than eight times what it was at the start of 2023. Yesterday, NVIDIA reported another record quarter, with revenues in the three months leading to July hitting $30 billion, surpassing market projections and setting a new all-time high. Investment bankers predict NVIDIA's annual sales could double this year to over $100 billion and continue growing at double-digit rates through at least 2027. Yet NVIDIA's shares fell on this news. Why might some investors be starting to question the company’s long-term prospects?

Wall Street remains enthusiastic about NVIDIA, not a single analyst tracked by Bloomberg is suggesting to sell. However, despite the bullish sentiment, some key contradictions cast doubt on NVIDIA’s future growth trajectory.

Dependence on Supplier Capacity

NVIDIA’s growth is heavily reliant on its relationship with Taiwan Semiconductor Manufacturing Company (TSMC), the contract manufacturer that produces NVIDIA’s chips. Until recently, NVIDIA was just one of TSMC's many clients, with Apple being the largest. However, as demand for NVIDIA’s AI chips has surged, the company has likely become TSMC's second-largest customer, contributing around 10% of the manufacturer’s revenues. Given NVIDIA’s purchase commitments, this share could grow, potentially even surpassing Apple’s in the near future.

While NVIDIA focuses on chip design, TSMC handles the complex and capital-intensive task of manufacturing them. TSMC is investing heavily to expand its production capacity, but constructing chip factories is a lengthy and intricate process. The more advanced the chips, the more sophisticated (and time-consuming) the factory needs to be. This creates a tension between NVIDIA's rapid pace of innovation — the company now aims to release a new chip every year — and TSMC’s slower manufacturing cycle, which requires 18-24 months to build new factories. TSMC typically begins construction only after prolonged discussions with clients, further slowing down the process. As a result, NVIDIA’s ability to scale its production is limited by TSMC’s capacity.

Price Sensitivity and Market Dynamics

Given this dependency on TSMC, NVIDIA may find it challenging to meet its revenue growth expectations without raising prices. While investors currently seem confident that NVIDIA can increase its prices without dampening demand, history suggests that technologies often become widespread by becoming cheaper, not more expensive. To maintain its current growth rate, NVIDIA might need to balance between sustaining high margins and expanding its customer base. If it pushes prices too high, fewer customers may be willing to pay a premium for its chips, potentially slowing its growth.

Already, there is some backlash from major customers like Amazon, Google, and Microsoft over NVIDIA's pricing, which is driving these companies to invest in developing their own chips. Furthermore, AMD, another chip designer that outsources its manufacturing, has grown its AI chip sales from virtually nothing three years ago to a forecasted $5 billion in 2024. While still a fraction of NVIDIA’s sales, AMD’s growth indicates it is eating into NVIDIA’s market share.

Geopolitical Risks and Competitive Pressures

Geopolitical tensions add another layer of uncertainty. U.S. sanctions have restricted Chinese tech firms’ access to NVIDIA chips, which could incentivize them to develop their own alternatives, much like how electric vehicle manufacturers have started to challenge Tesla’s dominance. Additionally, the tech industry is rife with examples of companies being overtaken by the next big innovation. While NVIDIA’s chips are currently optimal for generative AI — the technology driving its recent boom — they are not the only solution for AI computation. New technologies could emerge that render NVIDIA’s current offerings less relevant.

Reinvention vs. Competition

NVIDIA has successfully reinvented itself multiple times, evolving from a company selling GPUs for video games to one capitalizing on the cryptocurrency mining boom, and now to the AI chip leader. While it has shown resilience and adaptability in the past, the promise of high profits in the AI sector is likely to attract fierce competition. Whether NVIDIA can continue to outmaneuver its rivals and maintain its market dominance remains an open question.

Conclusion

While NVIDIA's recent performance has been extraordinary, its future is not without risks. Dependence on TSMC's manufacturing capacity, potential price sensitivity among customers, geopolitical risks, and the threat of emerging competition could all impact its ability to meet lofty growth expectations. Investors and analysts will be watching closely to see whether NVIDIA can continue to innovate and adapt in an ever-changing tech landscape.