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Nvidia (NASDAQ: NVDA) has been one of the biggest beneficiaries of rising spending on artificial intelligence (AI) development. The graphics processing units (GPUs) are an important part of the infrastructure for training and running large language models, the backbone of generative AI. Big tech companies like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) And Metaplatforms (NASDAQ: META) are currently spending billions of dollars to get their hands on as many Nvidia GPUs as possible.
That was great for Nvidia and its shareholders. Sales more than tripled in the first quarter of the fiscal year, reaching a record total revenue of $26 billion. But that kind of growth can’t last forever.
Analysts expect a more modest sales growth of “only” 38.4% next year. But some comments from Nvidia’s largest customers suggest that number may be too high.
Nvidia’s biggest customers just admitted they’re spending too much on AI
While Nvidia has seen its profits soar as a result of all the AI spending, this doesn’t necessarily apply to many of its biggest customers. An increase in capital expenditures, such as those required to build AI data centers, could be a cash flow bottleneck. This is especially true if those investments do not have an immediate impact on turnover.
That’s the challenge for cloud providers that rent computing infrastructure to developers. The three largest cloud providers are Microsoft, Amazonand Googling. If a developer comes to one of them and needs access to computing power he doesn’t have, he goes to one of his competitors. As a result, amid the current AI boom, they need to build data centers fast enough to ensure that when a new customer comes to them, or an existing customer requests more capacity, they can serve them.
Alphabet CEO Sundar Pichai made this clear when asked about spending on AI during company meetings second quarter earnings call. “I guess the only way I think about it is that when we go through a curve like this, the risk of underinvestment for us here is dramatically greater than the risk of overinvestment,” he told analysts. In other words, he is currently deliberately overspending to ensure he gets as many customers as possible. Microsoft and Amazon are likely to take a similar approach.
Meanwhile, Meta Platforms is building its own data center capacity to support AI development. CEO Mark Zuckerberg has the ambition to make Meta the leading AI company in the world. And that requires the infrastructure to be in place before the company’s software is ready for training and deployment.
“It is difficult to predict how this will develop over several generations in the future, but at the moment I would rather risk building capacity before it is needed, rather than too late, given the long lead times for starting up new infrastructure projects .” he said during Meta’s second-quarter earnings call.
His comments echo those of Pichai. Meta is now spending money in the expectation that it will grow to capacity. At some point, however, it will improve the size of its data centers. At that point, it will significantly slow its spending on servers and chips like Nvidia’s.
These comments carry a lot of weight (on Nvidia’s income statement)
The reason Nvidia shareholders should pay attention to everything Pichai, Zuckerberg and a few other big tech executives say about their AI spending is that the company has focused heavily on those customers.
Twenty-four percent of Nvidia’s total revenue in the first quarter came from just two customers. According to Seligman Investments analyst Paul Wick, between 60% and 70% of revenue comes from just 10 customers.
Because all that revenue is highly concentrated among just a handful of customers, a single change in investment policy at any of them could have a drastic impact on Nvidia’s bottom line. If Alphabet or Meta decide to cut spending after aggressively building capacity in a few years, Nvidia will see its growth slow significantly.
The stock is in a precarious position, with Nvidia stock trading at valuation multiples of around 50x forward earnings and 40x enterprise value to revenue. If the stock continues to exceed management and analyst expectations, the stock will continue to rise. But a quarter of poor results could send stocks reeling. The comments from Alphabet and Meta suggest that it may only be a matter of time before there is a sharp pullback in AI spending.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Amazon, Meta Platforms and Microsoft. The Motley Fool holds positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
Alphabet and Meta platforms just sent a major warning to Nvidia shareholders was originally published by The Motley Fool