Unless you’ve been living under a rock for the past year, you’ve probably noticed the bulls running wild on Wall Street. While a resilient U.S. economy has certainly played a role, the bulk of the gains have been in the growth-oriented one Nasdaq Composite and benchmark S&P 500 can be attributed to the revolution in artificial intelligence (AI).
Simply put, AI uses software and systems to perform tasks that humans would normally oversee or perform. What makes AI special and gives the technology such a wide range of usefulness is the ability of these systems to learn over time without human intervention. This can enable AI software and systems to become more proficient at tasks and perhaps even evolve to learn new skills.
AI’s broad appeal has analysts at PricewaterhouseCoopers (PwC) so excited that they estimate the innovative technology could add $15.7 trillion to the global economy by 2030. With numbers this big, there’s room for multiple big winners.
For now, no company is more directly associated with the rise of AI than the semiconductor giant Nvidia (NASDAQ: NVDA).
The $64,000 question is: can Nvidia continue the good times, or is a potential crash looming?
Nvidia has grown as big as no other market leader has ever achieved
For a very short period this month, Nvidia has taken the crown Microsoft And Apple to become the most valuable publicly traded company. That’s no small feat when you consider that Nvidia’s market cap was less than $360 billion when the curtain rose on 2023.
Nearly all of Nvidia’s $3 trillion market cap surge over the past 18 months and its recent need to complete a 10-for-1 stock split have been fueled by the popularity of its AI-focused graphics processing units (GPUs). The company’s H100 GPUs in particular have become the go-to chip for enterprises looking to run generative AI solutions and train large language models in high-performance data centers. In terms of computability, Nvidia’s chips haven’t been outdone.
In addition to its first mover benefits, Nvidia counts many of the country’s most influential companies among its top customers. Microsoft, Meta platforms, AmazonAnd Alphabet accounting for approximately 40% of Nvidia’s net revenue. It’s a testament to Nvidia that leading technology companies are lining up to use its GPUs in their AI-accelerated data centers.
We’re also talking about a company that has had outsized pricing power for its chips. Even with the leading chip manufacturing company Taiwanese semiconductor production By significantly increasing the chip-on-wafer-on-substrate capacity required to package high-bandwidth memory, Nvidia is still far from meeting enterprise demand for its GPUs. Higher prices lifted adjusted gross margin to a staggering 78.4% in the fiscal first quarter (ended April 28).
The icing on Nvidia’s cake is that it has retained its innovative advantages. With external competitors like Intel And Advanced micro devices Aiming to take on the H100, Nvidia is preparing to roll out its next-generation AI GPU architecture known as Blackwell.
Will the Nvidia stock price crash in the second half of 2024?
On paper, Nvidia can seemingly do nothing wrong. Wall Street’s AI leader has exceeded all revenue and profit forecasts presented to him for more than a year. But despite this outperformance and blueprint scaling we’ve seen, there’s a good chance Nvidia stock crashes in the second half of the year. is within the possible range of results in the next six months.
History is the biggest factor that points to Nvidia having zero chance of crashing in the second half of the year. I’m specifically talking about the history of the next big innovations/technologies and the valuation-based history.
About three decades ago, the proliferation of the Internet began to change the long-term growth arc of business in America. While there’s no denying that the Internet was a game-changing innovation for businesses, it took time for the technology to mature and for businesses to figure out how to use direct-to-consumer channels to generate sales and profits.
Every subsequent major innovation, technology, and trend that has emerged since the Internet has come with a lot of hype and big bucks. And an event that bursts a bubble early on. Whether we’re talking about decoding the genome, Chinese stocks, nanotechnology, the US housing market, 3D printing, cannabis stocks, blockchain technology, the metaverse, or the Internet revolution of the mid-1990s, history tells us conclusively that all new trends and technologies need time to mature. Artificial intelligence is unlikely to be an exception to this unwritten rule.
While Wall Street’s leading firms have no qualms about spending big on high-compute data center hardware, most companies lack a concrete plan for how they will lean on AI to grow revenue and profits. This is consistent with previous ‘next big thing’ innovations over the past thirty years and provides further evidence for early stage bubble formation.
The other historical issue for Nvidia has to do with valuation. When it comes to its year-to-date earnings ratio and price-to-earnings-growth ratio (PEG ratio), Nvidia isn’t showing any red flags. But when you look at its price-to-sales (P/S) ratio over the past 12 months, it’s a different story.
Before the dotcom bubble burst, Cisco systems‘ and Amazon’s TTM P/S ratios peaked in the high 30s to low 40s. Nvidia’s peak TTM P/S ratio was near the same level (around 42) a little over a week ago. While history doesn’t repeat itself with a T on Wall Street, it does have a tendency to rhyme. For leading companies, Nvidia currently finds itself in rare (and likely unsustainable) territory.
Unfortunately, history isn’t very accurate at predicting when corrections and crashes will occur. While it’s been spot-on for three decades when it comes to predicting when a bubble will burst for next-big-thing innovations and technologies, it’s far from a guarantee that Nvidia stock will crash in the second half of 2024.
While Nvidia’s AI hardware could prove quite successful in the long run and its market cap could increase significantly, it appears that Nvidia’s future is going to be bumpy at least until the end of 2024 if history is any guide.
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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. 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. 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, Cisco Systems, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 calls of $45 on Intel, long January 2026 calls of $395 on Microsoft, short August 2024 calls of $35 on Intel, and short calls in January 2026 from $405 on Microsoft. The Motley Fool has a disclosure policy.
Will Nvidia crash in the second half of 2024? History Weighs In and Offers a Big Clue was originally published by The Motley Fool
