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On Monday morning, we received disappointing news for investors in Nvidia stock. In fact, two pieces of news that caused the stock price to fall 4% after these announcements. In this video, I discuss each of these developments and what it could mean for Nvidia investors. the site to find out about the 10 best deals to buy now.
Okay . So, the first news: key customers are postponing orders for the latest Blackwell racks from the AI chip market leader due to overheating issues. The information appeared on Monday. So, if you don't already know, Nvidia's main customers right now are Amazon, Alphabet, Microsoft, Meta Platforms, right?
In addition, within Microsoft, I can add OpenAI and ChatGPT, although it is a separate company. So , these are Nvidia's main customers at the moment. These companies are building fact, in the latest earnings report, management noted that the cloud providers I just mentioned account for about 50% of data center revenue, with the rest coming from consumer internet and the enterprise sector.
So, in other words, these big tech companies—Alphabet, Microsoft, Amazon, OpenAI—account for 50% of the company's revenue. So if they postpone orders, it could have a significant negative impact on the company's business. At the same time, Nvidia management stated that the latest generation Blackwell technology is almost completely sold out for the next three to four quarters.
There is a queue of customers ready to receive these chips if there are order cancellations or excess supplies appear. There are customers ready and willing to buy them. So, if top customers get picky, there are others waiting in line to pick them up. However, reports of overheating problems are not a good sign.
This is not what you want to hear. Especially considering that Nvidia recently announced its intention to release new technologies every year. Before that, they did it every two years. So with such an accelerated pace, we can expect similar problems to arise. They hoped that they would be able to do it flawlessly, without problems and difficulties, as they had managed before.
One of Nvidia's most impressive traits is how they've been able to scale their business almost seamlessly. And the growth was exponential, was n't it? Their income in some neighborhoods grew by 200%. And that's very hard to do for a company that sells mostly hardware, right? It's easier to increase sales by 200% if you sell a software or digital product that doesn't require logistics or the production of physical items.
True? So, imagine what it's like to grow your business by 200% when you sell physical goods. That's a lot more stuff to create, ship, import, export, coordinate with delivery dates—that's a lot more to manage. This is a higher level of complexity. That's why you don't often see this in a business that sells physical goods.
This is more common in software companies or companies that sell digital products. And we should expect more difficulties similar to the one we're covering today— overheating issues. This is just one of the things that can happen when you try to scale a business selling products and go from updating technology every 2 years to an accelerated pace of development every year.
At the same time, you are experiencing this tremendous growth. So what Nvidia has been doing is an extremely complex business, and for the last 2 years they have been doing it almost flawlessly. So you can understand why the stock price increased by that much, right? The company was doing something extremely complex and doing it almost flawlessly in a market where demand was growing rapidly.
And this is one of the reasons for their great success. When you do something extremely complex and do it flawlessly, it protects you from the competition. This gives you an extra layer of protection, because if you're barely coping and performing at the highest level, your competitors will likely have an even harder time because it's not their core competency.
This is not what they have invested in for the last two decades. So this was to be expected, even though it's not good news. I was expecting something like this, some kind of step back from Nvidia, and this...it hasn't been confirmed yet. So these are just reports from informants. Nvidia has not confirmed this.
In fact, there were already reports of overheating issues a few weeks ago, which Nvidia's CEO denied. So, this remains a developing story. We will not jump to conclusions and claim that they definitely have problems. Okay, now on to the second piece of news that caused the stock price to drop today: the US government earlier said it would further restrict exports of AI chips and technology, potentially hurting Nvidia's sales.
Nvidia's sales have already been hurt by these export restrictions imposed on China in previous quarters. So Nvidia's business was already hit by this, and this will hurt it even more. Now let me explain in more detail how exactly this will hurt. I don't think it will hurt sales as much as this report suggests.
I believe this will hurt the business by making it more concentrated , meaning sales will be less geographically diversified, focusing only on certain regions: the United States and countries that the United States considers its really strong allies. And, as I mentioned at the beginning of the video, the demand for Nvidia products is simply skyrocketing.
There is a whole queue of people who want to buy Nvidia products. So if Nvidia can't sell its products to a certain country right now, there are others waiting in line to buy them. But this will result in business becoming more concentrated in fewer regions. And when you make your business more concentrated —fewer regions, fewer customers, fewer products—it increases risk because you rely on a narrower set of buyers, and if they decide to reduce their purchases, it will have a greater impact on your business.
Additionally, if your sales are focused on fewer customers and regions, over time, if the market situation changes, these buyers will gain more leverage over you because you will have no other options. And so these customers may return to Nvidia, say, in 2 or 3 years if the market for Nvidia products cools down and the restrictions remain in place; then they will be able to use more leverage on Nvidia, and the company may not be able to demand the kind of premium prices they have over the past two to two and a half years that have led to such a boom in Nvidia's revenue and profitability.
These are the events that are sending the stock price down three and a half percent today at the time of this video. These are serious developments, and certainly negative news for investors in Nvidia stock. Despite all that said, I don't think this is a reason to sell stocks. I still think these are great stocks and a great business.
Although, of course, this is not the best news. This is disappointing news for Nvidia stock investors. Hello everyone, if you like my videos, I have prepared a great app especially for you. I created a book, wrote a book that is already on sale, which describes my six-step investment approach . Even if you don't follow this methodology, learning how I evaluate stocks will make watching my videos much .
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