If that happens, Nvidia’s Jensen Huang says it would “bring this industry to a standstill”

Nvidia and other tech companies have benefited from huge growth related to artificial intelligence.
The regulation, however, could dramatically affect its growth prospects.
Chatbots have been sued for copyright infringement and even in wrongful death cases.
10 stocks we like better than Nvidia ›

The growth of artificial intelligence (AI) seems relentless. Tech companies continue to spend feverishly on new products and services in an effort to keep up. This growth has enabled chip manufacturers Nvidia (NASDAQ: NVDA) to become the most valuable company in the world, with a market capitalization of about $4.2 trillion today.

The tech giant has grown both sales and profits at a rapid pace. Its dominance in the AI chip market has drawn the attention of other companies, which are developing their own chips in an effort to be less dependent on Nvidia. But perhaps this is not necessarily the main concern for the business. CEO Jensen Huang believes that what could weigh not only on Nvidia but on the entire industry is regulation, if done poorly.

Worried person looking at a tablet. — Image source: Getty Images.

One thing that is clear with the growth of AI is that there needs to be strict regulations. Popular operating companies chatbots they face lawsuits for multiple reasons, including copyright infringement and lack of adequate safeguards for users. In some rare cases, users contemplating suicide have had questionable chatbot interactions. In at least one case, instead of giving advice to a troubled user on how to seek help, ChatGPT was accused encouraging the user to proceed with the act. And this is not an isolated incident.

The details of any regulation for AI are still uncertain. But if regulations become more complicated or vary by state, it could greatly affect AI’s growth prospects. “State-by-state regulation of AI would stop this industry and create a national security concern because we need to make sure that the United States advances AI technology as quickly as possible,” Huang told reporters on Capitol Hill earlier this month after meeting with President Donald Trump. Trump is in favor of putting in place a federal rule that would allow for greater clarity and consistency, which Huang believes is the right approach. Trump issued an executive order on Dec. 11 that aims to require AI regulations to be instituted on a national and not state-by-state basis. The legality of this order is likely to be challenged.

While tech companies like Nvidia would favor policies that allow them to continue growing at a rapid pace, some level of oversight is inevitable. How complicated and restrictive it is can significantly affect the industry’s short- and long-term growth prospects, and it’s an uncertainty that investors buying AI stocks should be aware of.

It’s been three years since the appearance of OpenAI’s ChatGPT in 2022, and that led to a rally in both the stock market and Nvidia’s sales. Three years ago, the business was struggling to grow and then things changed dramatically. Demand for Nvidia’s cutting-edge AI chips exploded. And although its growth rate has dropped over the past year, it remains high at over 60%.

NVDA revenue chart (quarterly year-over-year growth). — Data for YCharts.

Maintaining a high growth rate is key to Nvidia’s continued high valuation. The stock currently trades at a price-to-earnings multiple of 43, but investors remain bullish simply because of the expected growth ahead. The stock’s price-to-earnings-growth (PEG) multiple is around 0.7, which means good value given analysts’ expectations for future growth. But if those expectations are adjusted downward due to increased regulation, Nvidia could suddenly look like a much more expensive stock to own.

Heading into trading today, Nvidia shares are up 30% year-to-date. There is still a lot of excitement surrounding the stock, despite its high valuation. If you’re a long-term investor who’s willing to hold on for several years, Nvidia can still be a good investment. However, it is important to consider the short-term risks and uncertainty surrounding the economy and AI.

It’s likely to be a bumpy road ahead, but with Nvidia becoming a leader in the space, it’s still on track for much more growth in the future. Buying stocks at these levels can still make a lot of sense, but you should also prepare for the possibility of a short-term pullback.

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David Jagielski, CPA has no position in any of the aforementioned stocks. The Motley Fool has positions and recommends Nvidia. The Motley Fool has one disclosure policy.

If that happens, Nvidia’s Jensen Huang says it would “bring this industry to a standstill” was originally published by The Motley Fool

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