Thirty years ago, the Internet first went mainstream, setting in motion a series of events that forever changed the growth of American business.
Wall Street waited, sometimes impatiently, for the next big trend that could rival what the Internet did for business. After a long wait, the artificial intelligence (AI) revolution seems ready to answer the call.
AI gives software and systems the autonomy to oversee tasks that humans would normally perform. The key to AI’s long-term success, and the source of its seemingly limitless ceiling, is the ability of AI-driven software and systems to learn without human intervention. Machine learning gives AI the potential to become more proficient at existing tasks, and to learn new skills.
No company has benefited more directly from the rise of AI than the semiconductor giant Nvidia (NASDAQ: NVDA).
Until recently, Nvidia’s operational startup went smoothly
At the start of 2023, Nvidia had a market cap of $360 billion, putting it on the cusp of becoming one of the most influential technology companies in America. On June 20, 2024, less than two weeks after completing its historic 10-for-1 stock split, Nvidia’s market cap peaked at $3.46 trillion on an intraday basis. Investors have never seen a market leader gain more than $3 trillion in value in less than 18 months.
The catalyst behind this potentially once-in-a-lifetime move is the company’s AI graphics processing units (GPUs), which have become the standard in high-compute enterprise data centers. TechInsights semiconductor analysts estimate that Nvidia was responsible for all but 90,000 of the 3.85 million GPUs shipped to enterprise data centers in 2023.
Because demand for the company’s chips has outstripped supply, Nvidia has been able to dramatic to raise the selling price of its superstar AI-accelerating chip, the H100. Over the five quarters, the company’s adjusted gross margin rose by about 13.7 percentage points to 78.4%.
The hardware’s place at the center of attention in enterprise data centers has also led to continued innovation. In March, Nvidia introduced its next-generation Blackwell platform, which is capable of accelerating compute in a number of areas, including generative AI solutions, while consuming less power than its predecessor. In June, CEO Jensen Huang announced the launch of its Rubin GPU architecture, powered by a new processor known as “Vera.” Rubin is expected to debut in 2026.
The final piece of the puzzle for Nvidia’s, thus far, textbook operational ramp-up is that its suppliers have ramped up their capacity to meet robust demand. For example, leading chipmaker Taiwanese semiconductor production (NYSE:TSM) has increased the capacity of its chip-on-wafer-on-substrate (CoWoS), a necessity for packaging high-bandwidth memory in AI-accelerated data centers.
Nvidia is no longer flawless
This seemingly textbook example of a “recipe” as the leader of the hottest trend on Wall Street briefly helped Nvidia to Microsoft And Apple to become the largest publicly traded company. But after a few tough weeks for Nvidia and the stock market as a whole, it’s become clear that Nvidia is just as fallible as any other company.
To maintain its historic run, Nvidia had to execute flawlessly. It had to be able to sell all of its hardware, charge top prices for its products and software — the CUDA platform, which helps developers build large language models — and maintain its competitive edge by bringing its next-gen GPU architecture to market on time.
Unfortunately, reports emerged over the weekend that Nvidia has informed many of its top customers (all members of the “Magnificent Seven”) that it would be delaying shipments of its Blackwell chip by at least three months. This would push shipping to the first quarter of 2025, rather than an expected arrival date later this year.
According to multiple reports, the delay stems from potential design flaws at Blackwell, as well as capacity constraints at Taiwan Semiconductor (TSMC). Even with TSMC effectively doubling its CoWoS capacity, it’s still not nearly enough for Nvidia to meet demand from enterprise customers.
Blackwell’s delay is the first domino to fall that shows Nvidia isn’t perfect. It also opens the door for Nvidia’s competitors to flourish.
On July 30, Advanced micro devices (NASDAQ: AMD) AMD Inc. delivered second-quarter operating results that were greeted with open arms by Wall Street and investors. Sales for AMD’s data center segment increased 115% year-over-year and 21% quarter-over-quarter (i.e., compared to what was reported for the quarter ended March). AMD attributed this outperformance to the scaling of AI GPUs.
AMD’s MI300X in particular is significantly cheaper than Nvidia’s H100. While the H100 has some compute advantages over the MI300X, the H100’s behind schedule shipments, combined with the now-delayed Blackwell chip, gives AMD’s hardware a much higher profile.
To add, all four of Nvidia’s top customers have developed AI chips for use in their data centers. Even if Nvidia maintains its compute advantage, it will lose valuable data center “real estate” as its top customers opt to install its internally developed (and cost-effective) chips.
History suggests Nvidia’s selloff will get worse
To make matters worse, in three decades, not a single next-big-thing innovation, technology, or trend has escaped an early-stage bubble. In addition to the internet, investors have seen early bubbles burst in genome decoding, business-to-business trading, housing, Chinese stocks, nanotechnology, 3D printing, blockchain, cryptocurrency, cannabis, and the metaverse.
The problem with disruptive innovations and technologies is that investors overestimate their acceptance and utility. No matter how large the market to be addressed, it takes time for new technologies to change the growth landscape for corporate America.
For example, while most leading companies are spending heavily on AI-driven data centers, many lack a clear blueprint for how AI will help them grow revenue and make more money. Investors saw the same story just a few years ago with the rise of the metaverse and blockchain technology before it. All innovations take time to mature — without exception!
For three decades, market leaders for every next-big-thing trend have consistently declined in value by 80% or more. On a peak-to-trough basis, the leading companies behind internet/networking, 3D printing, genome sequencing, cannabis, cryptocurrency, and blockchain technology all fell by 90% or more before bottoming out.
The silver lining for Nvidia is that it has several established segments beyond its AI GPU business that could provide a loftier foundation than what other market leaders had when their respective bubbles burst. Nvidia’s GPUs used in gaming and crypto mining, coupled with its virtualization software, should stave off total obliteration.
Nevertheless, history is crystal clear that a big Pullbacks are in order once the euphoria surrounding a next-big-thing trend fades. Blackwell’s delay is the first domino to fall, and it strongly suggests the Nvidia selloff will intensify in the coming weeks, months, or quarters.
Should You Invest $1,000 in Nvidia Now?
Before you buy Nvidia stock, here are some things to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $643,212!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 6, 2024
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Microsoft, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long Jan 2026 $395 calls on Microsoft and short Jan 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nvidia shares have peaked and the first domino to fall will only exacerbate the sell-off was originally published by The Motley Fool
