That's no secret Nvidia (NVDA 4.07%) cuts a fine figure in the artificial intelligence (AI) market. Its AI accelerator chips are the first choice for high-end AI training systems, and these systems are in high demand these days.

Nvidia stock is a very direct bet on a long-lasting AI boom. It's not necessarily a slam dunk, and investors should keep some big risks in mind before buying these stocks. But there is a world in which Nvidia is on the rise and continues to outperform the stock market.

So let's take a quick look at Nvidia's investment risks and what it would take to keep the market leader going.

Nvidia does not have a monopoly on AI accelerator chips

It's true that Nvidia has given the competition a leg up. OpenAI's first public release of ChatGPT was trained on more than 10,000 Nvidia V100 accelerators. Later versions of the same LLM (Large Language Model) training setup will use many more units of newer, more powerful and more expensive accelerator chips. Nvidia's financial charts show a sharp turning point (aka “hockey stick” moment) as the company began fulfilling orders inspired by the ChatGPT release:

NVDA sales data (TTM) from YCharts

But there are actually many alternatives on the chip market. Advanced micro devices (AMD 2.43%) And Intel (INTC 7.42%) have their Instinct and Gaudi processors respectively. Cloud computing giants like alphabet (GOOG 4.04%) (GOOGL 3.99%) And Amazon (AMZN 3.81%) are ordering Nvidia chips en masse – but have also developed their own AI accelerators to reduce costs and achieve certain performance goals. Even OpenAI is collaborating with on a customized chip design Broadcom (AVGO 3.25%).

Each chip design has a different balance of performance, price, power and cooling requirements, and unique features. Intel is even bringing its own production facilities into play, bypassing the potential bottleneck that arises when every fabless designer fights for time on the usual production lines.

So far, Nvidia is in the lead, but who can say which chip designer could win the most lucrative next-generation design contracts? If the answer isn't Nvidia, investors could be in for a drastic price correction.

Nvidia stock isn't cheap, having risen 928% in two years

You see, Nvidia stock has skyrocketed in the ChatGPT era. The stock has gained 928% in two years and 216% in the last 52 weeks. With a market cap of $3.4 trillion, Nvidia stock trades at the lofty valuation ratio of 74 times free cash flow or 36 times sales.

This is the typical market performance of a young, hungry growth stock with big dreams and a small market cap. In order to generate this gigantic market value, the company must continue to generate enormous sales growth and profits for years to come. Any misstep along the way could result in a sudden price drop – either immediately or only after investors have taken time to digest the long-term impact of negative news.

Many potential drawbacks are beyond Nvidia's control

Despite its huge market capitalization and rising sales, Nvidia is not the world leader.

Economic downturns could take the wind out of the sails of the AI ​​boom. Nvidia's chosen design priorities could be less popular in a later (and more lucrative) generation of products than some other chipmakers' AI products. Regulators in key markets such as China and the United States could erect firewalls against international trade, undermining Nvidia's business prospects. Natural disasters can disrupt Nvidia's supply chains. International conflicts can have the same effect, but can also pose a challenge to the global economy.

Nvidia has no direct control over these issues. There is no risk-free investment, no matter how well positioned the company is and how perfect the management team's business plan. Unexpected events can always throw a spanner in the works, and that's bad news for high-flying market darlings.

Why you might still want to buy Nvidia shares today

But Nvidia is a market darling for good reason.

The chart above shows you how sales, profits, and free cash flow results are skyrocketing in the generative AI boom. Valuation metrics are high, but well below their peaks in summer 2023 – business results are keeping pace with investor enthusiasm.

And you should certainly be aware of the competitive risk, but Nvidia is still the silverback gorilla to beat in the AI ​​hardware market. Challengers have a lot of work to do, both in the chip design labs and in the marketing department.

I mean, Nvidia is stealing space from Intel Dow Jones Industrial Average (^DJI 3.57%) Market index reflecting a fundamental change in the semiconductor industry. And the incoming cash winnings do not remain unused in any bank account. Nvidia's product development budgets are suddenly among the most generous in the world, giving the company many new tools to defend its dominant market position.

Balance between AI optimism and risk-aware caution

So I understand why Nvidia is a popular investment idea at today's high prices and despite many business risks. The company's presence in the AI ​​market is inspiring, and these big cash profits should help Nvidia thrive in the long term.

And the stock has had a very positive impact on my own portfolio. I took some profits in February but left more than half of my position untouched. I'm not buying Nvidia shares at these prices, which seem a bit too generous given the aforementioned risks. But I'm happy to hold the remaining shares and see how the AI ​​market develops in the next few years. A small Nvidia position is almost mandatory for growth investors in 2024.