Up 145% So Far This Year, Here's What It Will Take for Nvidia Stock to Drop, and Why I Think It Could Happen Sooner Rather Than Later

The technology sector has been one of the best-performing industries so far this year largely thanks to rising euphoria around artificial intelligence (AI). Megacap technology behemoths have been the biggest beneficiary of the AI movement, and one stock in particular is having a bit of a moment right now.

Shares of semiconductor darling Nvidia (NASDAQ: NVDA) are up a whopping 145% so far in 2024 -- making it the top performer of the " Magnificent Seven " by a wide margin.

Considering the AI revolution is very much in its early days, there are many reasons to believe that Nvidia's best days are ahead. However, smart investors understand that stocks don't appreciate in value forever.

Let's dig into what the future could hold for Nvidia, and what it will take for the outsize momentum to normalize.

Nvidia's chips are in high demand, but...

Graphics processing units (GPUs), a type of semiconductor chip, have become some of the most in-demand products in the AI realm right now. GPUs are currently being deployed across a number of generative AI applications in robotics, autonomous driving, training large language models ( LLMs ), machine learning, and more.

At the moment, Nvidia is widely considered to be the market leader in GPU technology. The company's A100 and H100 chips are used by some of the world's largest businesses, including Tesla and Meta Platforms .

Moreover, the pace at which Nvidia is innovating is equal parts inspiring and impressive. Earlier this year, the company showed off its next-generation chips, known as Blackwell. According to management, demand for Blackwell is already outpacing supply -- a good indication that promising business results will continue.

While much of Nvidia's sales and profits can be tied to the company's chip business, it's important for investors to realize that a fair amount of competition is on the horizon.

Image source: Getty Images.

...competition is coming

Nvidia's closest direct competitors are Advanced Micro Devices and Intel . While each of these companies are much smaller than Nvidia, I see one big reason why their respective businesses could begin to experience some momentum.

Namely, investors should be paying close attention to Nvidia's supply-and-demand trends. On the surface, rising demand can be considered a positive. In essence, when businesses witness surging demand for products and services, they can attain lucrative pricing power . This can help accelerate sales while also serving as a catalyst for abnormally high margin expansion. Subsequently, soaring profits and cash flow tend to be the net result -- which helps companies reinvest into the business and other growth initiatives. This is precisely what is going on with Nvidia right now.

There is one drawback to outsize demand, though. If demand is so high that companies are having trouble fulfilling backlog, customers will begin looking for alternative solutions. Considering demand for Nvidia's Blackwell GPUs is already outpacing supply capacity, I think this is where AMD and Intel can make a move.

In addition to AMD and Intel, Nvidia also has a number of tangential competitors.

Amazon may be best known for its e-commerce marketplace and cloud computing infrastructure, but the company has several other opportunities that could pose a threat to Nvidia. In particular, as part of its deals with AI start-ups Anthropic and Hugging Face, Amazon will be integrating more of its own homegrown training and inferencing chips into its cloud services.

This exact strategy is taking shape at Meta as well. While Meta is currently a big user of Nvidia GPUs, the company hasn't been shy about its own ambitions. Similar to Amazon, Meta is developing its own chip -- dubbed Meta Training and Inference Accelerator (MTIA).

The underlying thesis for the MTIA chip is that it can help Meta internalize more of its technology stack and rely less on external vendors. In theory, this could lead to significant cost savings in the long run while also opening up new revenue opportunities.

The bottom line

Considering Nvidia's lead in the GPU space and its unparalleled pricing power, the company is experiencing a unique period of accelerating revenue and profits. However, there are a number of direct and indirect competitors emerging that I think will take a toll on Nvidia's chip business.

For this reason, I think it's highly likely that Nvidia will eventually lose its pricing power and experience a slowdown in revenue growth. Ultimately, if Nvidia begins to experience decelerating sales, the company's margins should contract and profits will likely start to decline as well.

While I do not think Nvidia will suddenly experience some sort of existential crisis, it's reasonable to say that the company cannot thrive on its GPU business forever. Investors looking at chip stocks may want to consider some of the alternatives explored above, as many of these businesses remain underappreciated in the broader chip realm.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy .