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Nvidia (NASDAQ:NVDA) has several very promising partnerships, and it should continue to grow rapidly, driven by the overall strength of its AI and auto businesses. Still, the company is facing at least two very tough challenges, and the valuation of NVDA stock is quite high.

Given the latter two points, I believe that there’s a significant chance of the shares underperforming the Nasdaq and other AI plays in the medium term and the long term. As a result, I urge investors to trim NVDA stock to 5% or less of their portfolios.

Promising Partnerships and Continued Rapid Growth on the Horizon

Of course, Nvidia’s top and bottom lines are soaring as it benefits from robust demand for its AI chips. Moreover, in the future, the company’s multiple, impressive partnerships should provide the chip maker with additional positive catalysts.

For example, Nvidia is partnering with Amazon (NASDAQ:AMZN) to “offer the first cloud AI supercomputer with NVIDIA Grace Hopper Superchip and AWS UltraCluster scalability” through Amazon’s cloud unit, AWS. And on the automotive front, Nvidia is collaborating with multiple major manufacturers, including BMW (OTC:BMWYY), Mercedes Benz, and the Taiwan-based giant, Foxconn.

Speaking of automotive, I expect Nvidia’s auto-chip business to accelerate tremendously as many more vehicles adopt advanced driver assistance systems (ADAS), self-driving technology, and other high-tech offerings.

In light of these points, I expect Nvidia’s overall growth to continue to be very strong for years.

A High Valuation and Two Important Threats

Based on many metrics, Nvidia’s valuation remains quite high. For example, its trailing price-sales ratio is a huge 26 times, while its enterprise value/EBITDA ratio is quite elevated at 50.

Adding further to my caution about the stock’s valuation, research firm Morningstar recently set a “fair value estimate” of $480 on the name. That’s only a few percentage points above the shares’ current level.

Further, Morningstar noted that NVDA expects its sales to China to fall meaningfully due to U.S. sanctions against the Asian country. Morningstar warned that additional American sanctions against China could hurt Nvidia.

Additionally, with the U.S. government seemingly determined to crush cryptocurrencies sooner or later, I fear that such a development would meaningfully and negatively impact Nvidia’s top and bottom lines.

According to one source, a change in the method of mining Ethereum (ETH-USD) contributed a great deal to a $1.5 billion decline in Nvidia’s revenue in Q3 of 2022.

Therefore, if Washington largely destroys the crypto sector, I wouldn’t be surprised to see Nvidia’s gaming revenue sink by $1.5 billion per quarter or $6 billion per year. (Its gaming revenue in Q3 came in at $2.86 billion). That would lower its overall top line by about 8%, likely resulting in a sizeable decline of the shares.

The Bottom Line on NVDA Stock

Morningstar wrote that it expects two of Nvidia’s competitors, AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC), to also generate “tremendous revenue growth” in the future.

I recommend that investors looking to capitalize on the AI chip boom consider diversifying their holdings by owning Intel and or AMD in addition to Nvidia, given the latter company’s high valuation and multiple threats.

Those for whom NVDA shares already constitute 5% or less of their portfolios can hold their positions at their current levels, while the investors who don’t already own the name should consider buying it if it falls 10% or more.

 On the date of publication, Larry Ramer held a long position in INTC. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

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