Nvidia Investors Should Worry About Customer Focus: Analyst

According to the company’s filing, just four customers brought in 46 percent of Nvidia’s total revenue in the second quarter — about $13.8 billion.

The companies are kept anonymous in the file. There is no disclosure law that compels Nvidia to reveal the names of its customers, Luria told BI.

But the customers are likely to be Microsoft, Meta, Amazon and Google, Luria said. All four companies are known to be increasing their GPU stocks as they aggressively pursue AI initiatives.

“The only way they’re not the top four is if one of their customers is a reseller,” Luria said, citing Dell and Supermicro as examples.

An Nvidia spokesman declined to comment, and none of the four alleged customers responded to requests for comment.

Luria said it’s “very unusual for a company” of Nvidia’s scale to rely on a handful of customers for much of its revenue.

“None of the other megacaps have a 10% customer base,” the tech analyst told BI, referring to large companies with a market cap of more than $200 billion. As of Wednesday, Nvidia’s market cap was $2.61 trillion.

Luria maintained a Hold rating on Nvidia stock, citing concerns about the sustainability of demand.

Jacob Bourne, technology analyst for Emarketer, told BI that the high concentration of revenue may be unusual in the context of the broader market. But he said that’s normal for tech companies that offer a specialized product like graphics processing units.

Emarketer is a subsidiary of Axel Springer, which also owns BI.

Nvidia said in a 10-Q filing that it has gone through periods where the company saw a significant amount of revenue from a limited number of customers and that “this trend may continue.”

In 2004 — when Nvidia was bringing in a fraction of the revenue it does today — the company’s 10-Q filing showed that just four unnamed customers brought in 51 percent of total revenue in the third quarter. At the time, Nvidia was working with PC manufacturers such as Dell and Sony to supply GPUs for PCs and gaming systems.

Luria told BI that Nvidia has historically kept the same four big customers — Microsoft, Meta, Amazon and Google — in its data center segment. But these have typically been balanced by Nvidia’s gaming and automotive segments, which have different customers.

“Customer focus has recently increased for NVDIA, as the data center business now represents a much larger proportion of total revenue,” Luria said.

He said this focus on customers should be the main concern of investors for the next year or two to three key reasons:

1. Big companies don’t rely on a single source

Large companies “don’t like to be beholden to one supplier for any category,” Luria said.

“Just like Walmart doesn’t buy all its chips from one supplier, Microsoft doesn’t like to buy its computer chips from one company,” he said.

Microsoft has made this clear before, Luria added, citing how the company has gradually moved away from Intel as the sole processor supplier.

2. Nvidia’s request could be temporary

Another reason investors should be concerned is that these big Nvidia customers have indicated they’re buying more GPUs without concern for their immediate return on investment, Luria said.

Companies “have communicated that they are ‘overinvesting,’ which means they are buying without considering the return on investment, usually not something that lasts very long,” Luria said.

Meta CEO Mark Zuckerberg told shareholders during an earnings call in April that any upside for his company’s AI efforts would likely take several years — so the current frenzy of Nvidia chips from customers big could be temporary.

That doesn’t mean Nvidia will be short of customers.

Bourne, the Emarketer analyst, told BI that Nvidia has a long list of customers, from countries to startups, that want to buy the company’s chips.

“Just because there are currently these few companies that really account for the lion’s share of Nvidia’s revenue doesn’t mean that’s always going to be the case,” he said. “We may see an influx of large new customers, and of course nation states could be among those buying a significant number of these chips.”

3. Increased competition

Also, more competition is coming for Nvidia.

Google and Meta announced new in-house chips for AI development earlier this year; Microsoft unveiled its custom AI chips in late 2023; and Amazon is developing its own chips to avoid paying for expensive Nvidia GPUs, BI’s Eugene Kim previously reported.

“All of these companies are in various stages of implementing their own AI chips,” Luria said. “Google and Amazon have been doing this the longest, which means their technology is already competitive with Nvidia, and Microsoft and Meta are catching up.”