Nvidia is facing its biggest challenge yet: The law of large numbers
Briefly

Nvidia's Q2 report beat very high forecasts for sales, revenue, and guidance while a small shortfall in data-center sales caused a modest intraday share decline. The company disclosed that 44% of its data-center franchise-chip revenue comes from two hyperscalers, raising concentration concerns. The larger investor risk is the law of large numbers: Nvidia's $4.44 trillion valuation and recent earnings base make future percentage gains require unprecedented absolute dollar growth. Even a modest target annual return would demand growth in earnings measured in billions, a pace unmatched by major established companies.
For the three months ended July 28, Nvidia beat analysts' already Brobdingnagian forecasts for sales, revenue, and guidance, though a shortfall in data-center sales proved a slight disappointment that sent shares around 1% lower in midmorning trading on Aug. 28. Some Wall Street analysts also expressed concerns over a disclosure in Nvidia's 10-Q that for its trademark franchise-chip sales to data centers-it's collecting 44% of its revenues from just two hyperscalers, assumed to be Microsoft and Meta Platforms.
If you're a Nvidia investor, or pondering buying its shares now, it's important to recognize that the threat to getting anything resembling big returns isn't that heavy dependence on a few big customers, or Chinese rivals playing catch-up, but the law of large numbers. Put simply, Nvidia's profits and market cap are already so gigantic that to reward shareholders, it would need to swell to a size dwarfing where any tech giant stands today,
Let's assume the minimum return you'd want from Nvidia's stock is 10% annually. Keep in mind that you'd be betting on a player that will only pay off if it waxes extremely fast from an already elevated P/E and market cap, and so you're taking a big risk that will happen-hence, even 10% looks like a pretty unspectacular win. Right now, Nvidia famously boasts the largest valuation by far of any U.S. company, at $4.44 trillion, beating second-ranking Microsoft by 19%.
Read at Fortune
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