Nvidia Is Playing a Dangerous Game

Dear Reader,

Today’s “hottest” stock could be headed for a fall, and hardly anybody sees it…

I’m referring, of course, to Nvidia (NVDA). You’d be hard-pressed to find a more adored stock in today’s market. And it’s easy to see why.

Shares of NVDA are up 200% year-to-date, handily beating the S&P 500 (up 17.8% since January). And that incredible run is well deserved.

Nvidia is the undisputed leader in AI GPUs with its H100 chips. Others are racing to develop competing chips. But for now, Nvidia controls the market. That means it gets to pick and choose who gets its chips and when.

But here’s what few realize: Nvidia could be facing competition soon. And anybody buying at these levels will almost certainly regret it. Let me explain…

Nvidia has certainly sold a fair amount of its products to big tech companies like Tesla, Meta, and Microsoft. But it’s also giving some smaller players access to chips that they wouldn’t otherwise be able to get.

Take CoreWeave.

The company founded by three commodity traders was looking to capitalize on the excitement and fortunes being made in the crypto markets back in 2017.

The trio had a passion for crypto mining. That process involves networking GPUs together to verify transactions on the blockchain. The reward for doing so: tokens of cryptocurrency.

The demand for crypto mining has cooled, but it turns out the process of networking GPUs together has another use case. And it might be even bigger than crypto mining was.

That is AI.

The rate of AI companies seeking access to the same GPU clusters used by crypto miners is now accelerating.

For example, CoreWeave made $30 million in revenue in 2022. It’s on pace to cross $500 million this year.

Even more impressive, the company has nearly $2 billion in orders for 2024 lined up.

That’s over 6,500% growth in 2 years.

In an interesting turn of events, cloud computing giant Microsoft is reportedly looking to spend potentially billions over several years with the startup.

Nvidia could sell all of its chips to major players like Microsoft. But instead it gives smaller players like CoreWeave a chance to get its most advanced chips as well.

When those companies go on to create a compelling business model, Nvidia can then invest in them.

In April, CoreWeave raised $421 million from four investors… one of which was Nvidia.

If Nvidia just sold to large competitors like Microsoft or Amazon, they’d have complete control over the market. That means strong recurring revenue for a company like Amazon. But it translates into lumpy sales for Nvidia.

Nvidia wants to facilitate competition and profit from the arms race. Getting the chance to play kingmaker with its investments in startups is another benefit.

But ultimately, it’s not a strategy that will work for Nvidia.

The demand for NVDA’s products appears almost insatiable at the moment. But the reality is that Nvidia can only produce and sell so many GPUs. And rather than exclusively selling to the biggest customers, the company is allocating GPUs more judiciously to smaller companies like CoreWeave.

In essence, Nvidia is choking off supply to the world’s largest cloud providers. It’s a move that will backfire.

Companies are learning that if they can’t rely on Nvidia to supply GPUs, then they’ll have to build their own. Nvidia is forcing companies, rich with resources, to create its own GPUs to compete.

I like Nvidia as a company, but I wouldn’t recommend buying at these levels. Competition is coming for the king. And besides, I think there’s a better opportunity under our noses.

Next Monday, the latest issue of the Near Future Report will be going out to subscribers. In it, I highlight a hardware company that is set to profit from heated competition with Nvidia. Be on the lookout for that coming pick if you’re subscribed. In the meantime, let’s wait to see how Nvidia’s moves play out.

Regards,

Colin Tedards Editor, The Bleeding Edge