Nvidia Stock: Breaking Down Its Key Risk and Why It’s Still a Compelling Buy in 2026

Nvidia’s outstanding financial year in 2026 (FY 2026) resulted from revenue generated by its data centers ($193.7 billion), which constituted the vast majority of Nvidia’s overall sales in FY 2026. The primary driver of revenue generated from its data centers is the demand for graphics processing units (GPUs) used to power Artificial Intelligence (AI) data centers, an area where Nvidia has a dominant market share. Despite its dominant market position, however, Nvidia is subject to one known risk; a risk that has become a primary topic of discussion and debate by investors.

The biggest risk factor for Nvidia is the fact that it is so heavily reliant on a select group of hyperscale clients for a significant percentage of sales related to AI GPU products. While Nvidia does not provide exact dollar amounts associated with each major customer, important disclosures illustrate how concentrated their customer base is. CFO Colette M. Kress confirmed in her earnings call that about one half of the Company’s overall revenues consisted of the sales to the top 5 cloud providers and hyperscale clients. Even more alarming was Nvidia's 10-K where it disclosed that only 2 direct customers represented 36% of their total revenue for fiscal year 2026.

A significant risk exists for Nvidia if any of its key customers decide to abandon Nvidia's GPU products and choose another alternative. This is not a remote possibility because the four largest cloud service providers in the world: Alphabet, Amazon, Meta Platforms and Microsoft, are expected to spend collectively $410 billion in capital expenditures in 2025, with an increase in that spending in the range of $600 - $700 billion anticipated by 2026 (according to a report from The Motley Fool). Importantly, all four of these technology companies have been developing their own proprietary AI chips for several years with varying degrees of success. Google recently introduced its eighth-generation tensor processing unit (TPU) to handle a significant number of the company's internal AI workloads. These proprietary chips allow for each company to meet their own business requirements while reducing their dependence on Nvidia's chips in the future.

The high dependency on investments and concentrated customers of enterprises have been and continue to be major concerns to investors. However, Nvidia has made significant efforts to minimize these risks by aggressively expanding its customer base to include not only the largest hyperscalers, but many more enterprise customers and sovereign customers. CEO Jensen Huang stated at the GTC 2026 conference that approximately 40% of Nvidia's revenue comes from customers other than the top five hyperscalers. As such, the wide array of different customers makes for a diverse customer base consisting of a variety of high-growth industries such as enterprise IT, robotics, and edge computing.

These smaller and mid-sized companies, in contrast to the world’s largest tech companies, do not create their own custom AI chips; rather, they utilize proven, market-leading solutions to power their AI projects. Nvidia remains the dominant solution for 80% to 90% of companies worldwide that are utilizing AI accelerators due to its significant share of the AI accelerator market. The strength of this dominant market share is reinforced by the company’s strong economic moat, created by its proprietary CUDA software platform that imposes high switching costs on its customers and creates long-term platform loyalty.

Nvidia's rapidly growing sovereign AI business (the area of business where a company sells its products/services to governments that are acquiring or building their own national AI systems/infrastructure) is a key pillar in their customer diversification strategy.

Countries around the world (e.g., Canada, France, Netherlands, Singapore, and the United Kingdom) are building/scaling their sovereign national AI platforms/initiatives using Nvidia's hardware/software.

In FY 26, sovereign AI generated significant results for Nvidia, with over $30B in revenue from sovereign AI initiatives (more than 3x the prior fiscal year's total). This new revenue stream has not only provided Nvidia with a significant increase in their overall revenue, but has also reduced their dependence on a small number of customers (hyperscalers).

I acknowledge that Nvidia has a variety of risks associated with the future development of its business. The ongoing efforts on the part of core cloud service providers to reduce their reliance on Nvidia’s products could potentially hinder the future growth of this business; however, I believe there are numerous benefits supporting Nvidia’s future development as an overall leader in the semiconductor business.

In addition to having diversified customers and a growing addressable market, Nvidia’s valuation is still appealing when compared compared to NIvidia’s long track record of growth. For example, Nvidia’s PEG ratio is below 0.7 (therefore, the company may be undervalued relative to the expected earnings growth) which is one of the most common measures that analysts consider in their investment decisions. This strong valuation, as well as Nvidia’s superior technology and software, provides confidence in Nvidia’s ability to maintain its leadership position for many years into the future. Therefore, for long term investors who can see past the risks related to customer concentration, Nvidia is an excellent stock buy in the semiconductor space.