Key Points
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Nvidia’s revenue has exploded alongside the AI boom, but its fate is tied to the massive capital expenditures of just a handful of big tech companies.
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Big tech has deferred the true cost of AI spending, and when those expenses hit earnings, companies may be pressured to cut back on chip orders.
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Nvidia’s stock could take a hit well before its order book does — all it takes is investors believing big tech will scale back spending in the years ahead.
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The beating heart of the artificial intelligence (AI) boom is, without a doubt, Nvidia (NASDAQ: NVDA). The chipmaker’s graphics processing units (GPUs) — the specialized chips that do the heavy math behind AI — power the data centers that train and run ChatGPT, Claude, and the vast majority of AI models.
It’s no surprise, then, that Nvidia has managed a multiyear win streak nearly unmatched in the modern era. In its fiscal 2022, the company booked $26.9 billion in revenue. Over the last 12 months, it booked nearly 10 times that — $253.5 billion.
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The stock has followed suit, up more than 600% since January 2022.
That kind of run can make an investor nervous. As unstoppable as Nvidia looks, there are real risks here, and most of them have been talked to death — customer concentration, fierce competition, the physical limits of the AI build-out. But the one I think matters most still flies under the radar.
Nvidia’s fortunes depend on big tech’s spending spree
The AI boom is being fueled, in large part, by the capital expenditures (capex) — the money a company sinks into long-term assets like buildings and equipment — of just a handful of firms. Big tech names like Meta, Alphabet, Amazon, Microsoft, and Oracle are spending on a scale we’ve never seen. Last year alone, these five shelled out a combined $412 billion — well over twice the total just two years prior.
That capex is the lifeblood of the AI economy. It flows to the construction firms building the data centers, the neoclouds operating them, and, most critically, to chipmakers like Nvidia.
So if that spending slows, Nvidia is in trouble. That much is obvious. What’s not obvious is why it might.
Why big tech’s profits look better than they really are
Investors have stomached the enormous spending these past few years for one simple reason: They’ve watched big tech’s earnings grow right alongside it. You see earnings per share (EPS) — a company’s profit divided across its shares — jump 100%, and you stop worrying about the bill. Why fret about spending when profits are exploding?
Here’s the thing: There’s a lag in the system, and that profit growth could soon look a lot smaller than it does today.
When Meta spends $50 billion on Nvidia chips, that doesn’t hit the books as an expense all at once. It counts as capex, and Meta can spread the cost over time. Say, $10 billion a year for five years.
That’s depreciation: spreading the cost of a big purchase across the years a company expects to use it. There’s nothing shady about it. It’s the same thing every business with trucks or factories has always done.
What’s different is the scale and the timing. A company often doesn’t start the depreciation clock until the equipment actually goes into service — and given how long it takes to build an AI data center, that can be a long wait.
Image source: Nvidia.
The depreciation wall is coming
We’re in a stretch where revenue is climbing while the true cost of all those chips hasn’t fully shown up in earnings yet — a “golden window where everybody looks good,” as one Morgan Stanley analyst put it. That period won’t last. A wall of depreciation is coming, and when it lands, it could drag down big tech’s reported earnings.
And that’s when investors may start to care about the spending. Faced with shrinking earnings, the Metas and Amazons of the world could trim those massive capex plans. Fewer dollars spent means fewer chips ordered, and fewer chips is bad news for anyone holding Nvidia.
Nvidia’s stock could fall before its sales do
Now, bulls will tell you Nvidia’s order book is booked solid — CEO Jensen Huang says he expects a $1 trillion backlog by the end of the year — so there’s not a real risk to Nvidia’s sales coming any time soon.
I don’t discount that, but stock prices are based on where investors think things are headed. Which means that Nvidia shares can take a hit well before Nvidia’s actual order book does. All that’s required is for investors to believe big tech is likely to scale back in the coming years.
What investors should watch for
The real questions are when this happens and how big the hit will be — and, I’ll be honest, no one knows. You can see the uncertainty in Wall Street’s own forecasts. Analysts’ revenue targets for big tech over the next few years are fairly tight. Their depreciation estimates are all over the map.
None of this makes Nvidia a bad company — it’s a great one, selling every chip it can make. But Nvidia relies on capex spending continuing to expand. That could slow once investors start to see the true cost of that spending show up in income statements. For my money, the depreciation wall is a big reason I’d think twice before buying Nvidia shares today.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Oracle. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
