3 Reasons to Buy This Artificial Intelligence (AI) Stock Is a Risk…And How Could It Fight Back?

It’s not a secret Nvidia (NVDA 2.64%) is making a mint in the artificial intelligence (AI) market. AI accelerator chips are the best choice for high-end AI training systems, and these systems are in high demand these days.

Nvidia’s shares are a very direct bet on the long-running AI boom. This may not necessarily be a slam dunk winner, and investors should keep a few major risks in mind before buying these shares. But there is a world where Nvidia succeeds and continues to outperform the stock market.

So let’s take a quick look at Nvidia’s investment risks and what it will take to keep the market-beating party afloat.

Nvidia doesn’t have a monopoly on AI accelerator chips

It’s true that Nvidia is ahead of the competition. OpenAIThe first public release of ChatGPT was trained on over 10,000 Nvidia V100 accelerators. Later versions of the same large language model (LLM) training setup will use a much larger number of newer, more powerful, and more expensive accelerator chips. Nvidia’s financials show a sharp turning point (aka the “hockey stick” moment) when it began filling orders inspired by the ChatGPT release:

NVDA Revenue (TTM) data Y Charts

However, there are actually many alternatives in the chip market. Advanced Micro Devices (AMD 0.70%) And Intel (INTC 3.26%) They have Instinct and Gaudi processors respectively. Like cloud computing giants Alphabet (GOOG 0.70%) (GOOGL 0.60%) And Amazon (AMZN 1.70%) They’re ordering truckloads of Nvidia chips, but they’ve also developed their own AI accelerators to cut costs and hit specific performance targets. Even OpenAI is working on a custom chip design. broadcom (AVGO 2.30%).

Each chip design comes with a different balance of performance, price, power and cooling requirements, and unique features. Intel even brings its own manufacturing facilities to the game, removing a potential bottleneck for every unfabulous designer struggling to save time on regular production lines.

Nvidia is on top so far, but who’s to say which chip designer will win the most lucrative design contracts of the next generation? If Nvidia isn’t the answer, investors could face a sharp price correction.

Nvidia’s shares, which increased by 928 percent in two years, are not cheap

You see, Nvidia’s shares soared during the ChatGPT era. The stock has gained 928 percent in value in two years and 216 percent in the last 52 weeks. With a market cap of $3.4 trillion, Nvidia’s shares trade at a high valuation ratio of 74 times free cash flow. 36 times sales.

This is the typical market performance of a young, hungry growth stock with big dreams and small capitalization. market value. In order for the company to gain this huge market value, it will need to achieve tremendous sales growth and profits in the coming years. Any misstep along this path could lead to a sudden price drop, either immediately or while investors have time to digest the long-term consequences of negative news.

Many potential downsides are beyond Nvidia’s control

Despite its massive market cap and growing sales, Nvidia doesn’t rule the world.

Economic crises could take the wind out of the AI ​​boom. The design priorities Nvidia chooses may be less popular in a later (and more lucrative) product generation than AI products from other chipmakers. Regulators in key markets such as China and the United States could undermine Nvidia’s business prospects by creating firewalls against international trade. Natural disasters have the power to disrupt Nvidia’s supply chains. International conflicts can have the same impact, but also challenge the global economy.

Nvidia has no direct control over these issues. No matter how well positioned the company is, no matter how flawless the management team’s business plan, there is no such thing as a risk-free investment. Unexpected events can always make things difficult, and that’s bad news for high-flying market enthusiasts.

Why you might want to buy Nvidia shares today

But there’s a good reason why Nvidia is the darling of the market.

The chart above showed you how revenue, earnings and free cash flow results are rising in the productive AI boom. Valuation rates are high but well below their summer 2023 peaks; business results keep pace with investors’ excitement.

You should definitely be mindful of competitive risk, but Nvidia is still the silverback gorilla to beat in the AI ​​hardware market. Competitors have a lot of work to do, both in their chip design labs and their marketing departments.

I mean, Nvidia is stealing Intel’s place in the market Dow Jones Industrial Average (^DJI 0.88%) reflects the major change in the market index semiconductor industry. And the incoming cash profits will not sit idle in some bank accounts. Nvidia’s product development budgets quickly became among the most generous in the world, providing the company with many new tools to maintain its dominant position in the market.

Balancing AI optimism with risk-conscious caution

So I understand why Nvidia is a popular investment idea despite today’s rich prices and many business risks. The company’s footprint in the AI ​​market is inspiring, and these huge cash profits will help Nvidia outperform in the long run.

And the stock has been very good for my portfolio. I made some profits in February, but more than half of my position remained untouched. I’m not buying Nvidia shares at these prices, which seem a bit too generous considering the risks mentioned earlier. But I’m happy to hold the remaining shares and see how the AI ​​market performs over the next few years. A small Nvidia position is almost mandatory for growth investors in 2024.