Wall Street turned in a banner performance in 2023. When the curtain closed, the Dow Jones Industrial Average had managed to hit multiple record highs, while the S&P 500 and Nasdaq Composite shot higher by 24% and 43%, respectively. A fresh bull market has emerged, and growth stocks are to thank for it.
Although the “Magnificent Seven” have collectively taken credit for the outperformance of the S&P 500 and Nasdaq Composite since the start of 2023, no megacap growth stock has stood out more than semiconductor company Nvidia (NASDAQ: NVDA). Shares have skyrocketed more than 327% in less than 13 months, with the company tacking on more than $1 trillion in market value.
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Headwinds are mounting for Nvidia
Nvidia’s outperformance is a reflection of the company becoming the infrastructure backbone of the artificial-intelligence (AI) movement. The company’s A100 and H100 graphics processing units (GPUs) are expected to account for up to 90% of the GPUs being put to work in high-compute data centers in 2024.
In particular, Nvidia’s pricing power with its AI-focused GPUs has been off the charts due to GPU scarcity. This phenomenal pricing power has been a big help to Nvidia’s gross margin, given that its cost of revenue has moved only modestly higher.
But this top-performing megacap stock is set to face mounting headwinds in 2024 (and beyond). Ironically, ramping up production of its A100 and H100 chips is likely to be a net negative for its gross margin. A substantial uptick in GPU production will reduce AI-GPU scarcity and diminish the company’s pricing power.
At the same time, competition in AI-inspired GPUs will progressively increase. Advanced Micro Devices and Intel know a thing or two about innovation and data center operations. Both companies are direct competitors to Nvidia’s high-compute data center dominance.
I’ll also add that U.S. regulators are doing Nvidia no favors. On two separate occasions, regulators have imposed restrictions on what chips the company can export to China, the world’s No. 2 economy by gross domestic product. Even…
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