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Why Nvidia’s Booming Stock May Fall 20%

December 28, 2016, 6:29 PM UTC

Shares of chipmaker Nvidia have gained 237% this year, making the company one of the best performing stocks of 2016. But famed short sellers at Citron Research say Nvidia’s stock is poised to fall about 20% after its big rally.

Citron, which generally picks stocks its thinks will decline in value, says there are half a dozen problems ahead for Nvidia, mainly related to top competitors Intel and Advanced Micro Devices. While Nvidia has been touting its progress in cracking new markets like computer chips tuned for artificial intelligence, most of its success in 2016 came from gains in its traditional PC and gaming graphics chips, the firm said in a report on Wednesday. That could leave it more vulnerable to traditional competition than many investors expect, the firm wrote.

Nvidia shares fell 5% in mid-day trading on Wednesday after the report was released.

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Citron, run by Andrew Left, is among the most prominent short sellers, or investors who bet stocks will decline in value. Last year, Left called Valeant Pharmaceuticals (VRX) as overvalued—dubbing it the “pharmaceutical Enron”—before its stock crashed.

Nvidia’s 2016 stock rise came as its revenue and profit have skyrocketed. Last quarter, revenue rose 54% from the same period a year earlier to a record $2 billion while net income increased 120% to $542 million.

But Citron said not much of the gain was from new markets, but rather from seizing larger market share in the gaming market from AMD. Such gains can’t continue at the same pace in the future, limiting potential growth.

Nvidia (NVDA) has also targeted selling more chips for large data center servers, but massive competition is coming in 2017 from new high performance chips from Intel (INTC) and AMD (AMD), Citron noted. And some of the largest data center owners, like Google (GOOGL), are shifting to their own custom chips. Apple (AAPL) could possibly do the same for graphics chips it buys from Nvidia, Citron said, though recent Mac models use AMD chips.

For more on Intel’s plans, watch:

Another problem could hit Nvidia’s profit margin as it competes more directly with Intel. Nvidia doesn’t own chip fabricating factories, as Intel does, and instead relies on outsourcing to manufacturers like Taiwan Semiconductor Manufacturing (TSMC). That gives Intel greater pricing flexibility, which could put pressure on Nvidia, Citron wrote. Intel could reduce the price of its chips by 37% and still have an 80% margin. Also, a deal to license intellectual property to Intel is coming to end, which will cut off a highly lucrative royalty stream, Citron says.

As fans of Amazon (AMZN) and Netflix (NFLX) found out in 2016, one year’s top performing stock is rarely a great bet for the subsequent year. For investors who made a killing in Nvidia this year, it may be wise to move on.