One number from Nvidia’s earnings report has me more concerned about the company’s growth.
When the word “semiconductor” is mentioned, it’s nearly impossible not to think of Nvidia (NVDA -4.08%) — and for good reason. Over the last five years, the company has grown its revenue and free cash flow by nearly 900% and 800%, respectively. With that level of growth, it’s no wonder industry analysts estimate that Nvidia holds at least 80% market share in the artificial intelligence (AI) chip realm.
By all accounts, Nvidia looks unstoppable. However, what goes up must eventually come down, right?
While analyzing Nvidia’s second-quarter earnings report, I stumbled across a metric that required a second look because I couldn’t believe what I saw. Specifically, I’m beginning to realize that Nvidia’s customer concentration trends might suggest the company’s growth could come to a screeching halt — and I think many investors could be caught off guard.
Let’s take a look at Nvidia’s customer concentration profile and explore why this is important to understand.
What is customer concentration, and why is it important?
Customer concentration measures a business’s revenue across its client roster. It helps answer questions seeking to hone in on how much sales are related to a specific customer or group of customers. For example, let’s say you have a business with 10 customers, and they collectively generate $1 million in annual sales. However, one customer is responsible for $500K. As an investor, would you be comfortable buying a business that relies on just one client for 50% of its annual revenue? Probably not.
Image source: Getty Images.
What does Nvidia’s customer concentration look like?
In late August, Nvidia reported earnings for its second quarter of fiscal year 2025. Per the company’s 10Q filing, 46% of total revenue came from just four customers. That’s right — almost half of Nvidia’s $30 billion in quarterly revenue came from only four customers. Although quarterly business trends can fluctuate dramatically, a look at Nvidia’s historical customer concentration metrics could suggest the company’s growth is increasingly hinging on a particularly small cohort.
During Nvidia’s first quarter (ended April 28), the company noted that 24% of total revenue was attributed to two direct customers and that two indirect customers each accounted for at least 10% of revenue. One of these indirect customers actually purchased their products through one of Nvidia’s largest direct clients.
In its annual report for fiscal year 2024 (ended Jan. 28), Nvidia disclosed that 13% of total revenue for the year hailed from one customer (noted as Customer A). The company further informed investors that “one indirect customer which primarily purchases our products through system integrators and distributors, including through Customer A, is estimated to have represented approximately 19% of total revenue.”
To put all this into perspective, Nvidia disclosed that no customer accounted for 10% or more of total revenue during fiscal years 2023 or 2022. Clearly, over just the last year or so, Nvidia has experienced soaring demand for its chips — but much of this growth seems to consistently come from a limited number of customers.
Why is this particularly worrisome for Nvidia?
It’s one thing to be concerned about rising customer concentration trends. However, looking at who this growth may be coming from brings an additional layer of alarm when assessing Nvidia’s growth prospects. While I cannot say for certain which companies are specifically in Nvidia’s top four, there are some good reasons to believe that much of the company’s growth can be traced back to the “Magnificent Seven” members.
Over the last year, executives such as Mark Zuckerberg and Elon Musk have cited that Meta and Tesla are aggressively buying Nvidia’s highly popular H100 graphic processing unit (GPU). This is great news at face value. Being the AI chip of choice for two of the world’s largest technology enterprises is more than just a nod of approval. However, investors shouldn’t be jumping for joy.
During Tesla’s second-quarter earnings call earlier in the summer, Musk gave some heavy signals that the company may seek to compete with Nvidia down the road. Moreover, Meta has been increasing its investments in capital expenditures (capex) — and not all of that is good news for Nvidia. Meta has developed its own chip, dubbed Meta Training and Inference Accelerator (MTIA), in an effort to move away from such a heavy dependence on Nvidia. On top of this, e-commerce and cloud computing juggernaut Amazon has also doubled down on its own AI roadmap — part of which includes developing its own training and inferencing chips.
To be clear, I don’t see the rising competition as an Achilles’ heel for Nvidia. Even if big tech begins to scale down their orders from Nvidia, I surmise the company will have little trouble finding new business. The real concern is that I think Nvidia will lose pricing power as more players enter the chip realm. So, even though Nvidia will likely still generate solid growth, I think the days of triple-digit revenue and profit acceleration could be nearing a close.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
