Is Nvidia's Increasing Reliance on "Customer A" and "Customer B" a Red Flag for the AI Growth Stock?

Core Insights - Nvidia has experienced significant growth, primarily driven by the artificial intelligence (AI) trend, with a shift in its key markets from gaming to data centers [1][2] - The company's revenue is increasingly concentrated among a small number of major customers, specifically referred to as Customer A and Customer B, which have become critical to Nvidia's financial performance [5][6] Customer Concentration - In fiscal Q1 2026, Customer A accounted for 16% of total revenue, while Customer B represented 14%. By fiscal Q2, these figures increased to 23% and 16%, respectively, indicating a rise from 30% to 39% of total revenue from these two customers in just three months [5][6] - Nvidia's total revenue was $44.1 billion in fiscal Q1 and $46.74 billion in fiscal Q2, with Customer A and Customer B contributing $13.23 billion and $18.23 billion, respectively [6] Supply Chain Dynamics - Nvidia's sales are heavily influenced by its supply chain structure, where key end users are hyperscalers like Amazon Web Services and Microsoft Azure, who often purchase Nvidia's products through contractors [8][10] - The complexity of the supply chain makes it challenging to pinpoint the exact contribution of each hyperscaler to Nvidia's revenue [11] Industry Context - Nvidia is not alone in its reliance on a few key customers; other companies in the tech sector, such as Broadcom, also depend on a limited number of clients for a significant portion of their revenue [12][15] - Broadcom has been working to diversify its customer base beyond its major hyperscaler clients, indicating a broader industry trend towards customer concentration [13][14] Future Considerations - While Nvidia's reliance on Customer A and Customer B is not inherently negative, it poses a risk if capital expenditures by hyperscalers decline in the future [17][18] - Currently, capital expenditures for major cloud companies are at a five-year high, suggesting ongoing expansion, but a shift towards generating free cash flow could impact Nvidia and similar companies [18][19]