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History says you’ll regret buying Nvidia stock

There is a shortage of powerful chips that can train and run advanced artificial intelligence (AI) models. Megatech companies are battling each other for AI supremacy, scooping up boatloads of it Nvidia‘S (NASDAQ: NVDA) data center GPUs are gradually emerging, and AI startups with sky-high valuations are proliferating.

There is little doubt that AI is a revolutionary technology. There is also little doubt, at least in my mind, that AI is fueling a classic bubble. Startups founded less than a year ago, such as Mistral AI, are already worth billions. Some publicly traded companies, especially server manufacturers Super microcomputer, have seen their valuations skyrocket to levels that seem illogical. Caution is increasingly being thrown overboard.

Nvidia’s GPUs are driving the AI ​​revolution

Nvidia and its GPUs take center stage. Not only are the company’s GPUs well-suited for the computations needed to train and run AI models, but its proprietary CUDA platform is also the de facto standard for accelerated computing for the past 16 years. As companies scramble to win the AI ​​race, Nvidia’s GPUs are the path of least resistance.

It’s no surprise that demand for Nvidia’s AI accelerators has skyrocketed. The company’s data center segment generated $18.4 billion in revenue in the latest quarter, a fivefold increase from the same period last year. Profits are also rising. In the recently completed fiscal year 2024, Nvidia earned net income of $32.3 billion, of which $60.9 billion was revenue.

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Nvidia stock has more than tripled in the past year, pushing the company’s market capitalization above $2 trillion.

Shortages don’t last forever

“I’ve seen a glut that wasn’t followed by a shortage, but I’ve never seen a shortage that wasn’t followed by a glut,” says Nassim Nicholas Taleb, considered an expert on risk. The inertia behind Nvidia’s CUDA has slowed competition, but a tsunami of competing AI accelerators is emerging. Nvidia’s incredible profits and pricing power won’t survive if supply catches up with demand.

Advanced micro devices launched new AI-centric data center GPUs late last year. Intel will launch the third generation of its capable Gaudi line of AI accelerators this year. OpenAI’s Sam Altman is reportedly looking for massive funding for new semiconductor factories to build AI chips. Cloud giants included Amazon, AlphabetAnd Microsoft design and install their own AI chips. The list goes on.

This is how the current shortage turns into an abundance. First, insatiable demand and excessive long-term forecasts are creating a wave of competition. This is what’s happening now. AMD has predicted that the AI ​​chip market will reach $400 billion by 2027. In perspective, global semiconductor sales last year were just over $500 billion.

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Second, future demand will inevitably lag behind these wild predictions. Demand for AI chips could still soar and exceed expectations in the coming years, given the optimistic players in the industry. Ultimately, this leads to a situation where there is more than enough supply of AI chips.

At this point, Nvidia’s pricing power would have been significantly eroded. CUDA would no longer be dominant as alternatives emerge and gain ground. For large cloud companies, there is a strong incentive to be able to support AI accelerators from a wide variety of vendors.

Look at the dotcom bubble

This isn’t the first time Nvidia stock has soared thanks to a revolutionary technology. The dotcom bubble of the late 1990s and early 2000s also caused the company’s valuation to rise to extreme levels. The aftermath was a disaster for shareholders.

NVDA PS Ratio Chart

NVDA PS Ratio Chart

Relative to revenue, Nvidia shares are much more expensive today than they ever were during the dot-com bubble. “This time it’s different,” you might say. The demand for AI is real and the company’s revenues are soaring. But you just uttered the four most dangerous words in investing.

This time power be different. Or the market dynamics that play out during almost every shortage of anything will manifest themselves again and undermine Nvidia’s pricing power and profits. By investing in Nvidia, you’re likely paying a high price to relearn the lessons of the dot-com bubble.

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Should You Invest $1,000 in Nvidia Now?

Consider the following before buying shares in Nvidia:

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Timothy Green has positions in Intel. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

History Says You’ll Regret Buying Nvidia Stock was originally published by The Motley Fool

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