Wall Street has been in a sensational bull market for almost two years. In recent weeks, the ageless Dow Jones Industrial Averagebroadly based S&P 500and driven by innovation Nasdaq Composite all rose to new record highs.
While there are a number of catalysts driving the broader market to new heights, including a resilient U.S. economy and better-than-expected corporate results for Wall Street’s most influential companies, the rise of artificial intelligence (AI) clearly tops the list.
With AI, software and systems oversee tasks that would normally be assigned to humans. What gives the technology such immense appeal—with analysts at PwC estimating a $15.7 trillion boost to the global economy from AI by 2030—is the ability of AI-driven software and systems to learn and evolve without human intervention. Machine learning gives AI utility across virtually every sector and industry.
When next-big-thing technologies emerge, professional and everyday investors alike are not afraid to inflate the valuations of the companies behind them. There is no doubt that no company has benefited more from the AI revolution than Nvidia (NASDAQ: NVDA).
At its peak, Nvidia’s stock market value soared by more than $3 trillion
Starting in early 2023, Nvidia’s H100 graphics processing units (GPUs) became the choice of choice for enterprises looking to run generative AI solutions and train large language models. TechInsights semiconductor analysts estimate that Nvidia was responsible for all but 90,000 of the 3.85 million GPUs shipped to high-compute data centers last year.
Having a veritable monopoly on the hardware that powers decision-making in AI-accelerated data centers is an enviable place to be. With demand for the company’s chips far outstripping supply, Nvidia has had no trouble significantly raising the price of its H100 GPUs and bolstering its adjusted gross margin.
What’s more, Nvidia isn’t resting on its laurels when it comes to innovation. While its H100 GPU has clear compute advantages over its rivals, Nvidia will roll out its next-generation GPU platform, known as Blackwell, in the second half of this year. In June, CEO Jensen Huang also teased the potential of its Rubin architecture, which is expected to ship in 2026. It appears that Nvidia has a blueprint for maintaining its compute advantage in AI-accelerated data centers.
This textbook operational expansion saw Nvidia’s valuation soar from $360 billion when the curtain rose on 2023 to a peak of nearly $3.5 trillion on an intraday basis on June 20. For a brief moment, Nvidia became the most valuable public company in the world.
Then the music slowed down…
Nvidia shares are down 26% in six weeks and could fall much further
Since peaking at $140.76 on an intraday basis, shares of Nvidia have fallen 26% to $103.73 as of the closing bell on July 30. In about six weeks, Wall Street’s AI darling has lost about $900 billion in market value, which is larger than the market cap of 493 of the 500 companies that make up the S&P 500.
While stocks don’t move up or down in a straight line, history suggests Nvidia has a lot continue to descend.
Over the past three decades, Wall Street has had no shortage of innovations, technologies, and trends that were considered groundbreaking. Think of the advent of the internet, genome sequencing, business-to-business trading, housing, Chinese stocks, nanotechnology, 3D printing, cryptocurrency, blockchain technology, legalized cannabis, augmented/virtual reality, the metaverse, and now artificial intelligence.
While market leaders for each trend listed above enjoyed early parabolic moves to the upside, the music and euphoria eventually died down. While some of these innovations became wildly successful for patient investors (the Internet), others flopped and never came back (3D printing and cannabis).
The key point here is that all new technologies, trends, and innovations take time to mature. While a $15.7 trillion market probably sounds great on paper, the reality right now is that a majority of businesses don’t have a plan for how they’re going to use AI to drive additional sales and grow their bottom line.
The only constant for the next big innovations is an overestimation of acceptance, adoption and usability by the investment community – and this includes Wall Street analysts and institutions. Every trend I mentioned above has had a bubble bursting event in its early stages, and there is nothing to suggest that AI won’t follow suit.
Market-leading companies tied to the advent of the internet, business-to-business trading, genome decoding, cannabis, and cryptocurrencies all fell by around 90% or more after their respective bubbles burst. Meanwhile, the face of the metaverse, Meta platforms (NASDAQ: META)dropped 80% before hitting bottom.
Meta Platforms enjoyed a more solid foundation because it had its established social media assets to lean on in the event that the hype surrounding the metaverse died down. Meta generates about 98% of its revenue from advertising, and no other social site draws anywhere near the number of daily active users that it does.
Nvidia offers similarities in that it has an established GPU business for data centers, gaming, and cryptocurrency miners, along with virtualization software and automotive/robotics solutions. Even if the AI bubble were to burst, these established segments should keep Nvidia shares from falling 90% or more, as we’ve seen with other next-big-thing innovations.
Still, history makes it pretty clear that bubble-bursting events aren’t good for market leaders behind next-big-thing trends. An 80% drop for Nvidia isn’t just a possibility — it’s expected, given what history tells us.
Headwinds are mounting for Wall Street’s AI darling
And to make matters worse, history isn’t the only setback facing Wall Street’s AI darling.
From the second half of this year, Intel expects to roll out its Gaudi 3 AI accelerator chip on a large scale. This coincides with Advanced micro devices continues to ramp up production of its MI300X AI GPU, which considerable cheaper than the H100 on a cost basis. Even if Intel and AMD’s chips remain inferior, in terms of compute power, Nvidia’s inability to meet overwhelming enterprise demand will open the door for Intel and AMD to step in to fill the void.
Additionally, Nvidia’s four largest customers by net revenue (all of whom are members of the “Magnificent Seven”) are developing AI chips in-house for their respective data centers. While these GPUs are unlikely to outperform Nvidia’s, they are significantly cheaper than Nvidia’s chips and will take up valuable “hard space” in data centers in the months, quarters, and years ahead. The implication is that Nvidia’s GPU sales to America’s most influential companies have peaked.
We’re already seeing evidence that Nvidia’s market share dominance is waning. After reporting an adjusted gross margin of 78.35% during its fiscal first quarter (ended April 28), the company forecast an adjusted gross margin of 75.5% (+/- 50 basis points) for its fiscal second quarter. While Nvidia’s margins have expanded significantly over the past 18 months, the first (expected) consecutive decline since 2022 suggests that the AI scarcity driving rising GPU prices is about to abate.
It may only be a matter of time before Nvidia loses its trillion-dollar market cap.
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Randi Zuckerberg, former chief marketer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Intel and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms 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.
Nvidia is down 26% in 6 weeks, but history shows an 80% drop may be appropriate was originally published by The Motley Fool
