Nvidia Investors Need A Reality Check, Focus On Risks Facing Global Chip Industry: FT

Despite Nvidia’s share price tripling this year, Asian chipmakers, who manufacture all of Nvidia’s chips, have reported their lowest earnings in years, an opinion piece carried by Financial Times reports.

Unprecedented Demand, Limited Output: Expectations of unprecedented demand for artificial intelligence (AI) chips have pushed Nvidia NVDA to a market capitalization of over $1trillion.

However, the production of these high-end chips is capped due to the capital-intensive nature of chip production. Building a chip fabrication facility costs more than $20 billion and parts must be continually upgraded due to the rapid pace of chip technology change.

The report adds that unprecedented demand is much less exciting when output is capped. This limitation is a reality check for investors who believe Nvidia's record-beating rally can continue.

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AI Chips – A Small Fraction of Chipmakers' Sales: For the foreseeable future, AI chips will only make up a small part of the total sales for chip manufacturers. Nvidia has to share the production resources of these manufacturers with big clients like Apple.

For instance, when a new iPhone is launched, it requires a massive order of high-end chips. Currently, there’s an oversupply of chips, which hides potential risks. Furthermore, Nvidia’s chips are also crucial in the gaming and crypto sectors, which adds to the competition for chip supply.

In conclusion, investors need to consider the risk of limited chip supply and also moderate their expectations regarding the speed at which the market can expand.

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