Will Ebiefung, The Motley Fool
4 min read
In This Article:
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The technology sector is a wealth-creation machine.
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Nvidia has already enjoyed multibagger returns since 2020. But how much longer can the momentum continue?
A million dollars is enough to change most people's lives. For example, putting that money into relatively low-risk assets like 30-year Treasury bonds would earn you more than the U.S.'s median annual income without reducing the principal. But while investing a million dollars is easy, making it is significantly harder.
To earn multibagger returns in the stock market, you typically have to bet on innovative companies with strong economic moats and massive addressable markets. Nvidia (NASDAQ: NVDA) has historically fit this bill with its industry-leading artificial intelligence (AI) chips. That said, past returns don't guarantee future success. Let's dig deeper to see if this megacap technology leader is still a long-term winner.
Many analysts were optimistic about Nvidia's first-quarter results, which saw its sales jump by 69% year over year to $44.1 billion while net income increased by 31% to $22.1 billion. Big tech companies continue to pour billions into Nvidia's hardware to run and train their generative AI workloads. And Nvidia's CEO, Jensen Huang, continues to strike an optimistic tone, claiming that entire countries are beginning to realize that AI is an "essential infrastructure" alongside electricity, water, and the internet.
However, behind the hype, there are some signs that Nvidia's business is slowing. While sales grew 69% this year, that represents a deceleration from last quarter when they grew by 78% compared to the prior-year period. Furthermore, Nvidia's gross margins are also shrinking (down from 73% last quarter to 60.5% this quarter). Net income actually fell by 15% from the previous quarter -- an undeniable sign that things are changing.
Some of the weakness is due to recent regulatory challenges in China, where the Trump administration made it harder for Nvidia to sell its H20 chips, leading to a $4.5 billion impairment charge based on losses on excess inventory and failed purchase obligations. And while Nvidia plans to reenter the market with new products, investors should keep in mind the risk of continued regulatory setbacks.
Over the long term, Nvidia will face competition from homegrown Chinese rivals such as Huawei, which aims to take its market share with advanced AI chips of its own. And it is unclear if Chinese consumers will be comfortable building their businesses around Nvidia hardware that can be taken away at the whim of the U.S. government.
