Nvidia’s latest sell-off highlights how heavily its lofty valuation depends on a few hyperscale customers.
Shares of Nvidia (NVDA +1.42%), the leading supplier of artificial intelligence (AI) accelerators for data centers, were knocked down hard this week when reports circulated that social media company Meta Platforms (META 0.35%) may be considering a chip deal with Google parent Alphabet (NASDAQ: GOOGL) (GOOG 0.96%) to help power some of its data centers beginning in 2027. This news may have caught Nvidia investors off guard, as Nvidia has been the center of the AI data center buildout boom for years.
Additionally, the news was particularly surprising, as Nvidia had made no indication during its most recent earnings report of any meaningful U.S.-based competition in the AI chip space.
Of course, 2027 is far off — and a lot can change between now and then. But the fact that Meta is even reportedly considering relying on an Nvidia alternative for some of its AI data center buildout is concerning its shareholders, since Nvidia now generates almost all of its revenue from data center chip sales.
Here’s a closer look at how the report shows why this may be a red flag for Nvidia investors, and not a buy-the-dip moment.
Image source: Getty Images.
Exceptional momentum
Before the Meta-Alphabet news hit, Nvidia’s fundamentals looked anything but fragile. In the third quarter of fiscal 2026, which ended on Oct. 26, revenue reached $57 billion, up 62% year over year and 22% from the prior quarter. Data center revenue was $51.2 billion, up 66% year over year and 25% sequentially, as demand for Blackwell GPUs continued to ramp up.
Additionally, management’s tone remained confident. Nvidia CEO Jensen Huang emphasized in the company’s fiscal third-quarter update that sales of its Blackwell GPUs were “off the charts,” and it noted that its cloud GPUs were completely sold out.
Nvidia’s guidance was also a signal of the strong demand for the company’s products. Management said it expected fourth-quarter fiscal 2026 revenue of about $65 billion, which would represent another meaningful increase versus the already record fiscal third quarter.
Competition could wear on pricing
But could Nvidia’s dominance be challenged over the next few years?
Meta is reportedly in talks to spend billions of dollars on Alphabet‘s tensor processing units (TPUs) beginning in 2027 and could start renting the chips through Alphabet’s Google Cloud even earlier.
The market reaction to this report has been swift. Nvidia shares fell sharply, while Alphabet stock moved higher. Even Broadcom, which helps design and manufacture Alphabet’s TPUs, saw its stock soar on the news.
The worry some Nvidia investors may have is about pricing and the durability of today’s extraordinary data center margins over a longer horizon. If competition heats up, pricing on Nvidia’s chips could come under pressure.
Today, Nvidia still dominates the market for AI chips — and many customers will likely continue to prefer its products. Still, the Meta-Alphabet talks highlight the risks of large buyers pivoting away from Nvidia’s products the moment viable alternatives meet their performance and cost targets.
If Meta ultimately commits billions of dollars to TPUs for new data centers, even while continuing to use Nvidia GPUs elsewhere, that could meaningfully chip away at Nvidia’s share of the next wave of AI infrastructure spending — and it could erode Nvidia’s pricing power.
Today’s Change
(1.42%) $2.52
Current Price
$180.34
Key Data Points
Market Cap
$4380B
Day’s Range
$178.24 – $182.91
52wk Range
$86.62 – $212.19
Volume
5M
Avg Vol
196M
Gross Margin
70.05%
Dividend Yield
0.02%
The valuation leaves little room for disappointment
Even after the recent pullback, Nvidia’s stock is still priced for continued dominance. The stock currently commands a price-to-earnings ratio of 42. That might be defensible if Nvidia can maintain rapid revenue growth and extraordinary margins while AI spending expands. But if alternatives to its offerings begin to make inroads, the company’s growth could slow at the same time that margins come under pressure.
The Meta-Alphabet headlines, of course, do not prove that Nvidia’s moat is narrowing. It’s too early to know. The headlines do, however, reinforce a key risk: Nvidia relies heavily on a small group of cloud and AI leaders that are ramping up investments in internal and alternative silicon to control costs and reduce dependence on a single supplier. If those efforts succeed, Nvidia may face more pricing pressure and slower growth later in the decade than current valuations suggest.
For investors, that makes this sell-off tricky. The underlying business remains exceptionally strong, but the stock still embeds high expectations at a time when Nvidia’s largest customers are exploring credible competitors. Given that combination, treating this pullback as an automatic buy-the-dip moment arguably looks premature rather than prudent.