As I expected, Nvidia’s (NVDA -5.12%) The rocket-like rally is stalling. Shares are down about 21% over the past 30 days. And while Nvidia is still a great company, the combination of high valuation and low diversification leaves room for further downside. let us examine how recession fears and artificial intelligence (AI) fatigue could impact the next three years.

Economic storm clouds gather

It’s impossible to predict a recession with certainty, but data points to a possible slowdown in economic activity. Only 114,000 new jobs were created in the U.S. in July, compared to expectations of 175,000, while the unemployment rate hit 4.3%, its highest since 2021. And while the Federal Reserve is expected to stimulate growth by cutting interest rates, that may be too little, too late to avoid a so-called hard landing. Rate cuts can be a helpful tool, but they can’t magically solve every problem of a shaky economy.

For Nvidia, a recession could be a disaster. While the company dominates the AI ​​industry by developing cutting-edge Graphics processors (GPUs) required to run and train these complex conversation algorithms, tilt prevent its business model from being affected by macroeconomic factors beyond its control.

Nvidia sells luxury Products

Nvidia’s The business has been cyclical in the past. When money is tight, consumers are less willing to buy expensive computer upgrades, opting instead for cheaper used options – or The above them all. While the shift to enterprise-level hardware insulates Nvidia from the whims of PC gamers, similar dynamics could emerge in the AI ​​chip market.

Analysts are beginning to raise the alarm about The Billions Be spent on AI hardware, with limited results in the end result. Goldman Sachs analyst Jim Covello sums up the situation in drastic terms: “DDespite the high price, the technology is still far from where it should be in order to be useful. Do things overbuild the world not has no use for it or is not ready for it usually ends badly.”

Image source: Getty Images.

While tech companies are content to speculate on unprofitable AI investments in good times, current spending levels may no longer be sustainable in a weaker economy. During a recession, companies typically cut their non-essential and unprofitable segments first, and right now, AI seems to clearly fit into this problematic category.

Nvidia may be under-diversified

Nvidia’s First-quarter revenue rose 262% to $26 billion, driven by data center chip sales, which rose a staggering 427% to $22.6 billion. But while this growth is impressive, it represents the bulk of the Nvidia’s Financially, the eggs are in one basket. Data center revenue now accounts for 87% of total revenue, driven by a few flagship products such as the A100 and H200, which are typical large language models (LLMs) such as ChatGPT.

Other segments such as gaming (10% of revenue) or professional visualization (2% of revenue) have become irrelevant in the current market, making Nvidia vulnerable to a possible decline in demand for AI accelerator chips.

Is Nvidia stock a buy?

Having risen by over 450% over the past three years, Nvidia stock has historically been a spectacular investment. And given its leadership in the global chip industry, there is still a lot of positivity about the company. However, shares appear to have peaked for now.

With a Price-earnings ratio (P/E) multiple of 42, Nvidia’s Valuation prices for future growth that may not materialize, especially if the U.S. economy begins to weaken and enterprise customers begin to rethink their massive AI chip purchases. Nvidia appears to be overextended in this fragile industry and could face a significant Correction in the next few years.