In a March column on Nvidia stock (NASDAQ:NVDA), I wrote that the company’s long-term outlook was strong due to my belief that the utilization of artificial intelligence would grow tremendously in the coming years. However, I warned that Nvidia stock could undergo significant pullbacks in the short-to-medium term, largely due to increased competitive threats in the AI chip space.
Now I’m doubling down on that thesis as I’ve identified additional, strong competitors that are well-positioned to take market share away from Nvidia and/or force it to reduce the extremely high prices that it’s been charging for its AI chips.
What’s more, there are indications that a number of Nvidia’s customers have been stockpiling NVDA’s AI chips, creating bloated inventories and suggesting that the firm’s growth rate could decelerate in the coming quarters. As a result of these issues, I continue to recommend that investors looking for a name that will give them exposure to both the chip sector and the ‘Magnificent 7’ buy a small amount of NVDA stock.
Additional Competitors for Nvidia in the AI Chip Space
In my previous column, I identified Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD) as posing “rising competitive threats” to Nvidia. But it appears that the firm is facing other, significant competitors in the space.
First, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) are all developing their own AI chips. Moreover, Qualcomm (NASDAQ:QCOM), Intel, and Alphabet have formed an alliance focused on weaning AI developers off of Nvidia’s chips, Reuters reported last month. Also importantly, the cloud infrastructure units of Amazon, Alphabet and Microsoft are all “offering easier access to AI computing services for customers.”
The chances of all of these competitive threats cumulatively taking a big bite out of Nvidia’s share of the AI chip space, which recently stood at 90%, are quite high, in my opinion.
Bloated Inventories of Nvidia’s Chips
Nvidia’s AI chips were reportedly undergoing “inventory pressure” as of the end of February. Indeed, some of Nvidia’s customers held excess inventories of the firm’s AI chips, enabling them to resell some of Nvidia’s hardware to other firms. The “high maintenance costs” of Nvidia’s chips is also causing a number of its customers to seek to resell them.
As of the end of February, however, the prices of Nvidia’s AI chips had not dropped meaningfully. But increased reselling of the products, along with the stepped-up competition that I discussed in the previous section, are likely to put significant pressure on the prices of Nvidia’s chips in the not-too-distant future.
The Outlook of Nvidia Stock
Analysts, on average, expect Nvidia’s earnings per share to soar nearly 90% this year. Given the company’s rapidly intensifying competition and the meaningful inventory pressures that it’s starting to face, along with indications that its video-game market may be weak, I expect the firm to fall at least slightly short of that mark. And if my prognosis is correct, Nvidia stock could easily undergo a 15%-25% pullback at some point this year.
On the other hand, however, I agree with the assessment of AI by JPMorgan (NYSE:JPM) CEO Jamie Dimon, who wrote that the technology’s impact “will be extraordinary.” Moreover, I’m convinced that Nvidia will be able to make significant improvements in its AI chips that will enable it to benefit tremendously over the long term from the proliferation of AI.
And finally, I’m sure that Nvidia will get a big boost from increased utilization of AI in autos and many other products. In light of these points, I remain bullish on the long-term outlook of NVDA stock.
Therefore, one worthwhile approach for long-term investors may be to buy a small amount of NVDA stock now and then add to their positions on any major, future pullbacks by the name.
On the date of publication, Larry Ramer held long positions in INTC and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.