Key Points
A growing number of tech companies are making their own chips in an effort to be less dependent on Nvidia.
Nvidia's stock trades at a high earnings multiple, which means investors are pricing in a lot of future growth.
Nvidia(NASDAQ: NVDA) is the undisputed chip giant these days. Tech companies have been loading up on advanced artificial intelligence (AI) chips in an effort to build the latest and greatest products and services, and that path has often gone through Nvidia.
But many tech companies have also been looking at other options. Some have turned to custom chipmakers to diversify and reduce their dependence on Nvidia, while others, like Amazon, are designing their own chips.
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Does this spell trouble for Nvidia's stock?
Image source: Getty Images.
Could the bull case for investing in Nvidia crumble?
The big reason many investors don't scoff at paying more than 40 times earnings for Nvidia stock is the expectation that the business will continue growing at an incredible rate, driven by persistently high AI spending among top tech companies. In fact, its price-to-earnings-growth (PEG) multiple of 0.72 suggests it's an incredibly cheap stock to own, given the growth analysts expect from the business over the next five years.
Five years, however, can feel like an eternity in tech. Five years ago, ChatGPT hadn't even launched. Generative AI wasn't the buzz term it is today. Knowing how strong Nvidia's business will be in the future is by no means certain, not when other companies are working to become less dependent on Nvidia's high-priced chips.
Investors are buying the stock on the assumption that not only will AI spending remain high in the years ahead, but that the bulk of the money companies spend on chips will also flow through to Nvidia. Neither is a sure thing.
Nvidia isn't a risk-free investment by any stretch
As companies feel pressure to make their AI investments pay off and turn a profit, one clear way to do so is to reduce costs. And that can come from paying less for chips if they can develop them in-house or through a custom chipmaker.
It's a risk that Nvidia investors should be aware of and consider, especially if you're basing your decision on whether to invest in the stock on how strong its business might be in the future. There are many unknowns, too many to know for sure whether it will still be a high-growth machine or be long past its peak.
There isn't a reason to panic for now, as the company continues to perform exceptionally well -- its growth rate was 73% in its most recent quarter. But if you're paying 40 times earnings for a stock, you need to consider what that entails, as it prices in a fairly optimistic view of the business's future. And if that doesn't line up with reality, the stock could be vulnerable to a sell-off. If you aren't willing to take on that risk, you may want to look for safer investments to own instead of Nvidia.
Should you buy stock in Nvidia right now?
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
