Since the spread of the Internet some 30 years ago, there hasn’t been a next-big-thing technology, innovation, or trend that has come close to rivaling… until now.
According to analysts at PwC, the advent of artificial intelligence (AI) is expected to add $15.7 trillion to the global economy by 2030. With AI, software and systems gain autonomy over tasks that would normally be controlled or performed by humans. The catch is that these systems have the ability to learn and evolve over time without human intervention. The ability to become more proficient over time gives AI utility in virtually every sector and industry.
While most AI stocks have been unstoppable over the past eighteen months, they have Nvidia (NASDAQ: NVDA) who undoubtedly stands on a pedestal above all others.
Since the start of 2023, Nvidia shares have risen 828% as of June 19, 2024, with the company adding nearly $3 trillion in market value and recently undergoing a 10-to-1 stock split. Nvidia has effectively been dethroned Microsoft And Apple this week to become the world’s largest publicly traded company.
But while short-term catalysts help explain the euphoria surrounding AI and Nvidia, tangible long-term headwinds are piling up that suggest the world’s most popular artificial intelligence stock is in an irrational bubble that will ultimately push it out of its trillions in market cap. dollars could push. club.
The euphoria around Nvidia may be approaching a crescendo
No company has benefited more directly from the AI revolution than Nvidia. The company’s H100 graphics processing units (GPUs) have quickly become the standard in AI-accelerated enterprise data centers. Nvidia’s hardware is essentially the “brains” behind the split-second decision-making and computing power needed to train large language models and run generative AI solutions.
Recently, semiconductor analysts at TechInsights released data showing that 3.85 million GPUs will be shipped in 2023. Nvidia was responsible for 3.76 million (98%) of these shipments. This makes it easier to understand why the company’s data center segment grew revenue more than fivefold in its first fiscal quarter (ended April 28) compared to the year-ago period.
Furthermore, demand has completely overwhelmed the available supply of AI GPUs. When demand for a good or service exceeds supply, it is normal for the price of that good or service to increase significantly. It’s not uncommon for H100 GPUs to sell for around $30,000, pushing Nvidia’s adjusted gross margin to a scorching 78.4%!
Nvidia’s first mover advantages also help Nvidia in terms of innovation. As rivals try to catch up to the H100, Nvidia has been busy developing its next-generation AI GPU architecture. It unveiled Blackwell in March, which will roll out in the second half of the current calendar year, as well as Rubin, which was unveiled in June and is expected to be released in 2026. On a computing basis, catching Nvidia could pose a challenge to external competition.
With Nvidia missing Wall Street sales and growth expectations for more than a year, it’s understandable why fear of missing out (FOMO) has struck among investors. Unfortunately, the combination of FOMO and the next big investment trends is historically a train wreck waiting to happen.
Nvidia could struggle to remain a trillion-dollar company in 2026
The biggest enemy for Nvidia and its shareholders is history. While history shows that the major stock indexes rise for long periods of time, it is also quite clear that the next big investment trends are undergoing a maturation process that involves a bubble bursting.
Since the mid-1990s, every touted breakthrough technology, innovation or trend has resulted in an early-stage bubble. While not a comprehensive list, this includes the Internet, business-to-business trading, genome decoding, nanotechnology, housing, Chinese stocks, 3D printing, cannabis, blockchain technology, augmented reality, and the metaverse. Without a doubt, investors always overestimate the acceptance of these breakthrough innovations/trends by consumers and businesses, leading to high expectations not being met. It would be foolish (with a small “f”) to expect AI to change this trend.
To add fuel to the fire, most companies lack a blueprint of how they will use artificial intelligence to grow their revenue. While many of America’s most influential companies are investing in AI solutions because that’s the most important thing to do right now, this isn’t really changing for most of these companies (except for hardware players like Nvidia). Every technology takes time to mature, and AI is nowhere near a mature innovation at this stage of the game.
Competition is another obvious problem. Even if Nvidia maintains its GPU computing advantages over its competitors, the company seems destined to lose market share. Advanced micro devices And Intel are both launching their AI GPUs designed to compete directly with the H100 in AI-accelerated data centers. With overwhelming demand for Nvidia’s chips, AMD and Intel should have no trouble earning market share from impatient enterprise customers.
As I’ve noted countless times, Nvidia’s competition is also internal. Microsoft, Metaplatforms, AmazonAnd Alphabet accounting for approximately 40% of Nvidia’s net sales.
While it’s great that Nvidia can call the most influential companies in the world its top customers, it’s equally concerning that Microsoft, Meta, Amazon, and Alphabet are developing AI GPUs in-house for their respective data centers. Once again, Nvidia can maintain its competitive advantage and still lose if these four companies choose to rely on their own chips and reduce their dependence on the largest publicly traded company by market cap.
As the number of AI GPUs deployed increases, the scarcity that drives the H100’s retail price into the stratosphere will diminish. In other words, it’s a scenario where Nvidia’s adjusted gross margin returns to historical norms.
I have witnessed similar scenarios play out numerous times with the next big innovations of the past three decades, it’s only logical to expect Nvidia’s FOMO to diminish as well. If that happens, which is expected to happen by or before 2026, Nvidia could struggle to remain a trillion-dollar company.
Should You Invest $1,000 in Nvidia Now?
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel, long January 2026 $395 calls to Microsoft, short August 2024 $35 calls to Intel, and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Prediction: Artificial Intelligence (AI) Nvidia stock will struggle to maintain its trillion-dollar market cap by 2026, originally published by The Motley Fool
