Should You Follow These Billionaires And Dump Nvidia Stock? 3 questions to consider

Semiconductor specialist Nvidia (NVDA 1.69%) has emerged as the face of the artificial intelligence (AI) revolution. Over the past two years, the company has gained trillions in market cap and is now lagging behind Apple and Microsoft being the third most valuable company in the world.

And yet, despite his meteoric rise to the top, some of the world’s biggest hedge funds have been for sale Recent Nvidia stock. Two notable examples include Ken Griffin’s Citadel, which cut its stake in Nvidia by 79% last quarter and DE Shaw cut its position by about half.

Don’t you find it strange that big-name investors are selling Nvidia stock on the back of AI being the next big frontier?

To be honest, maybe not. Below, I’ll explore three areas that could convince billionaires to reduce their positions in Nvidia while looking for growth elsewhere.

1. How will competition affect Nvidia?

One of the most integral components of generative AI development are advanced chipsets called graphics processing units (GPUs). While Nvidia is currently the biggest fish in the GPU pond, there is another side to this growth story. Namely, many other companies, including Microsoft, Amazon, Alphabet, Meta platformsand even adzeare developing their own AI infrastructures.

Many of these companies already build their own custom chips. This could be a problem, as each major tech giant described above has long been rumored to be a major Nvidia customer.

I recognize that using their own chips won’t be the end for Nvidia. These companies will likely remain customers and complement their chips with Nvidia infrastructure.

That said, I think Nvidia will gradually lose its pricing power as the GPU market becomes more saturated. Although it will take years, Nvidia will likely begin to see a decline in revenue growth. As its top line begins to decelerate, I think it’s only natural that Nvidia’s gross margins narrow, which can significantly reduce the company’s overall earnings strength.

For these reasons, I think more sophisticated investors are starting to realize that Nvidia’s ability to consistently generate record revenues and profits is shrinking.

2. Will the government come knocking?

At this point, Nvidia is way ahead of peers such as Advanced microdevices or Intelin the field of GPUs. Perhaps the strongest pillar supporting Nvidia’s fortress is the tight integration between the company’s hardware and software.

Nvidia’s Compute Unified Device Architecture (CUDA) software layers are added on top of the company’s GPUs. It’s incredibly difficult for developers to use a combination of chips from other companies with Nvidia’s CUDA. As a result, companies are opting to train their AI protocols entirely on Nvidia’s end-to-end product suite.

This dynamic has helped Nvidia gain an estimated 88% share of the GPU market. What’s even more astounding is that the company’s next-generation Blackwell GPUs, due out later this year, could easily help Nvidia gain even more momentum and market share dominance.

While this has played a big role in Nvidia’s current trajectory, the momentum may be stalling. Why? Well, given Nvidia’s pseudo-monopoly, it’s entirely plausible that the Department of Justice (DOJ) will investigate Nvidia’s business practices. In turn, Nvidia could be forced to weaken its ecosystem, which would have implications for the company’s growth.

3. Can lightning strike twice?

The chart below illustrates Nvidia’s stock price over the past two years. With more competition on the horizon and the possibility of government intervention, it’s hard to buy into a narrative where Nvidia stock rises another 900% over the next two years. I don’t think the company has enough catalysts to run at a commensurate pace over the next few years.

NVDA data by YCharts.

The bottom line

There are a lot of unknowns surrounding Nvidia and its future prospects.

Will new chips from other members of the ‘Magnificent Seven’ be a detriment to Nvidia? Will the DOJ accuse Nvidia of self-dealing and force the company to open up its products to be more congruent with competing chips?

What I can say with some confidence is that the likelihood of Nvidia stock becoming another multibagger anytime soon is slim.

Given the uncertainty surrounding Nvidia, its competitive landscape, and the pulse of the AI ​​market in general, I think selling some stock and taking profits while retaining some allocation in the company is a prudent strategy.