The first half of 2024 is behind us and the bulls are still in control on Wall Street. The mature equity-driven Dow Jones Industrial Averageyardstick S&P 500and growth stock-driven Nasdaq Composite all rose to record heights.
While a number of catalysts are responsible for Wall Street’s gains, much of the credit goes to what is perhaps the hottest trend since the advent of the internet in the mid-1990s. I’m talking about the rise of artificial intelligence (AI).
The broad scope of AI includes the use of software and systems to perform tasks that humans would normally perform or oversee. What makes this disruptive technology so appealing is the ability of AI software and systems to learn without human intervention. The ability to become more proficient at assigned tasks or perhaps evolve to learn new tasks/jobs gives artificial intelligence utility in most sectors and industries.
As you can imagine, estimates of how much AI could change the growth curve for businesses are all over the place. But according to a report released last year by analysts PwC, AI is expected to add $15.7 trillion (Yeswith a “t”) to the global economy around the turn of the century.
With such large sums, it’s easy to see why AI stocks are the best thing since sliced bread in 2024. But amid the vast sea of stocks that have benefited from the AI revolution, Nvidia (NASDAQ: NVDA) reigns supreme.
The most important question is: how long can Nvidia remain on this pedestal?
If history is any indication, Nvidia’s glory days appear to be long behind us.
Nvidia’s operational approach followed a textbook example
Nvidia has spent more than a year scaling its operations to levels never before seen by an industry leader. After reporting $27 billion in full-year revenue for fiscal 2023 (end of January 2023), Nvidia is expected to report more than $120 billion in revenue for fiscal 2025 (end of January 2025).
The company’s innovative AI-focused graphics processing units (GPUs) have enabled this tremendous revenue and profit growth. Nvidia’s H100 GPU in particular has quickly become the standard in AI-accelerated data centers. TechInsights analysts recently reported that Nvidia’s chips accounted for 98% of the 3.85 million AI GPUs shipped last year.
Despite its first-mover advantages, the AI leader isn’t sitting still. While competitors scramble to catch up with the H100 GPU, Nvidia plans to roll out its next-generation Blackwell chip later this year. CEO Jensen Huang also recently previewed the company’s “Rubin” AI GPU architecture, due out in 2026. It seems like Nvidia will have no trouble maintaining its compute advantage.
Additionally, enterprise demand for AI chips has completely overwhelmed their available supply. This was music to management’s ears, as it allowed the company to significantly increase the price of its H100 chip. The continued shortage of AI GPUs pushed Nvidia’s adjusted gross margin above 78% in the fiscal first quarter (ended April 28).
But when things on Wall Street seem too good to be true, investors usually have to worry.
Nvidia shares could fall as much as 56% by year’s end
This isn’t the first time Nvidia has been the primary beneficiary of a next-big-thing innovation or technology trend. In 2018, the company’s stock soared on the back of rising cryptocurrency prices.
While not all digital currencies use a proof-of-work (PoW) mechanism to validate transactions on the blockchain, some of the most prominent cryptocurrencies do, such as BitcoinValidation with PoW is done via cryptocurrency mining.
Cryptocurrency miners use powerful GPUs to solve complex equations and verify payments. The first miner to validate a group of transactions, called a block, receives a block reward (tokens of the digital currency being mined). Nvidia’s GPUs have become the go-to hardware for cryptocurrency miners.
But shortly after the cryptocurrency bubble burst, Nvidia quickly gave up a significant portion of its previous gains. Less than three months after reaching its next-big-thing innovation peak in October 2018, Nvidia shares had fallen by 56%!
We have also seen other leading companies in the sector suffer rapid pullbacks when the next major bubbles burst. AmazonThe peak was reached in December 1999, before the dotcom bubble burst. In the six months that followed, however, the value fell by two-thirds. Cisco systems dropped 37% just months after the dotcom bubble peaked.
I mention Amazon and Cisco Systems because these were two market leaders that were trading at some of the most expensive trailing-12-month (TTM) sales valuations before the dotcom bubble burst. On June 20, 2024, when Nvidia hit its all-time high, its TTM price-to-sales ratio was nearly identical to Amazon and Cisco’s peaks.
The point is that if Nvidia peaked at over $140 per share on June 20, its decline from that pedestal is unlikely to be gradual. History has shown that once bubbles burst, industry leaders get sent to the barn pretty quickly — hence my prediction that it could lose up to 56% from its peak by the second half of 2024.
But that’s only part of the story.
With every subsequent major innovation or technology undergoing a bubble-burst event early in its life, Nvidia will face its first real influx of competition. Well-known semiconductor giants Advanced micro devices And Intel have chips that accelerate AI and which they will roll out in the second half of this year or ramp up production of.
Here’s the interesting quirk that Nvidia faces: Even as its H100 and Blackwell chips retain clearly identifiable compute advantages, the company is still prone to losing market share. Nvidia is at the mercy of its suppliers, meaning it can’t meet the demand of all of its customers. This opens the door for AMD and Intel to step in to fill the void.
As I mentioned earlier, Nvidia’s four largest customers are also developing their own AI GPUs. While it’s unlikely that these chips will outperform Nvidia’s AI GPU architecture, their presence alone signals that the world’s most influential companies are looking to reduce their reliance on the current AI leader.
Furthermore, the sheer presence of these new AI GPUs taking up valuable AI-accelerated datacenter space means that Nvidia’s pricing power will diminish over time.
History shows that the stock market crash when a new, big bubble bursts is not exactly fun. Nvidia’s big drop may already have begun.
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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. Sean Williams has positions in Amazon and Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Bitcoin, Cisco Systems, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long Jan 2025 $45 calls on Intel and short Aug 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Prediction: Nvidia could drop 56% in second half of 2024 was originally published by The Motley Fool
