Nvidia’s Biggest Customers Face a Painful New AI Bill

Nvidia (NVDA) has been the undisputed king of the AI boom. Its chips power major artificial intelligence systems, driving the tech stock up 1,300% since the start of 2023. But even Nvidia can’t dodge a supply problem that will affect AI spending for its largest customers. 

According to Bloomberg, Nvidia has told its key customers that servers built with its AI chips will cost more than 15% more starting early next year. The reason comes down to one thing: memory chips.

Chip Stocks Are Caught in a Memory Squeeze

Nvidia’s AI processors are only as powerful as the memory paired with them, and that memory, known as DRAM, is made almost entirely by three companies: Samsung Electronics, SK hynix (SKHY), and Micron Technology (MU). 

Even as DRAM manufacturers expand output, they can’t keep pace with current demand. The demand-supply gap has pushed memory prices higher while offering Micron and its peers near-term pricing power.  

According to Bloomberg:

• In addition to Nvidia, Apple (AAPL) and Qualcomm (QCOM) have also said they will raise product prices due to chip shortages.  
• Nvidia has also raised prices on its gaming graphics cards, with some models climbing as much as 39%.
• Companies that build servers under contract for giants like Microsoft (MSFT), Alphabet’s Google (GOOGL) (GOOG), and Oracle (ORCL) have reportedly told their own customers about the coming price hikes.
• The increases will impact systems built with both Nvidia’s newest Vera Rubin chips and its current Grace Blackwell chips, and the size of the hike will depend on the chip generation and how much memory each system carries.

Nvidia Is Growing at a Steady Pace

Nvidia’s pricing power amid supply-chain bottlenecks allowed it to report a 75% gross margin in its first quarter. In fiscal 2023 (ended in January), its gross margins were much lower at 57%. 

Speaking at Bank of America’s Global Technology Conference on June 4, Nvidia CFO Colette Kress said the company has roughly $124 billion in purchase commitments tied to its supply chain. Kress explained that Nvidia often locks in supply deals with partners more than three years ahead of shipping a product. 

Nvidia’s data center networking business, which connects thousands of chips so they can act as one giant computer, grew 199% year over year to nearly $15 billion last quarter.

The bigger question for investors is whether these price hikes crack open the door for competitors. 

Amazon (AMZN), Microsoft, Google and Meta (META) are all building their own in-house AI chips, but Bloomberg noted they still depend heavily on Nvidia for their data centers, and their ability to break away further will hinge on their access to memory from Samsung, SK hynix, and Micron.

Kress herself downplayed the idea that customers would switch to cheaper, older hardware to dodge the increases. 

She told the Bank of America audience that new data centers are being built for maximum efficiency, and that older systems like Nvidia’s Hopper are still earning strong returns for cloud providers, which gives them little reason to walk away from Nvidia.

Bloomberg also pointed out that these price hikes land at a tricky moment for the industry, with project delays, labor shortages, tightening capital markets, and local pushback already complicating AI data center construction plans.

Nvidia reports fiscal second quarter earnings today, in what is one of the most closely anticipated updates in the entire market. With memory costs now squeezing margins across the AI supply chain, investors will be looking for any sign of how Nvidia plans to manage the tradeoff between rising costs and the runaway demand that has made it the world’s most valuable public company.

Is NVDA Stock Still Undervalued?

Valued at a market cap of over $5 trillion, Nvidia will have to beat estimates in fiscal Q2 and provide a robust guidance. 

Analysts tracking NVDA stock forecast revenue to increase from $216 billion in fiscal 2026 to $909 billion in fiscal 2031. In this period, free cash flow is projected to expand from $97 billion to $500 billion. If NVDA stock trades at 15x forward FCF, it could surge 50% over the next four years. 

Out of the 48 analysts covering NVDA stock, 43 recommend “Strong Buy,” three recommend “Moderate Buy,” one recommends “Hold,” and one recommends “Strong Sell.” The average NVDA stock price target is $307.38, above the current price near $210.