Although Nvidia has put on a masterclass for Wall Street, the story has a long and perfect track record when it comes to other big innovations.
Three decades ago, the arc of growth for the US and the global economy was forever changed by the advent of the Internet. Although there have been many other big trends and highly touted innovations that have tried to follow in its footsteps, none have managed to match what the Internet has done for businesses — until now.
The rise of artificial intelligence (AI) is seen by some experts as the most important step forward in innovation since the Internet became widespread. When we discuss “AI”, I’m talking about the use of software and systems for tasks that would normally be supervised or undertaken by humans. Most importantly, these software and systems are being given the tools to learn and evolve over time without human intervention, which opens up endless possibilities in almost all sectors and industries.
How big is the global AI opportunity? Last year, researchers at PwC released a report (“PwC’s Global Artificial Intelligence Study: Harnessing the AI Revolution”) that estimated AI would add $15.7 trillion to the global economy by the end of the decade. This otherworldly figure will be driven by a combination of productivity gains ($6.6 trillion) and consumption spillovers ($9.1 trillion).
Wall Street and investors won’t ignore such massive numbers, that’s why fraudulent AI Nvidia (NVDA 2.91%) has been virtually unstoppable since early 2023.
Image source: Getty Images.
On paper, AI titan Nvidia has been flawless
In just over 17 months, Nvidia stock has gained more than 700% and reached over $2.6 trillion in market value. Last week, the company went under for a while Apple to become the second largest publicly traded company in the US, and on Friday, June 7, after the closing bell, Nvidia completed a 10-for-1 stock split. This marks the second stock split since July 2021.
Although Nvidia has multiple operating segments, its lightning-fast growth rate has been driven entirely by sales of high-powered graphics processing units (GPUs) used in AI-accelerated data centers.
Nvidia’s H100 GPU has become the go-to choice for businesses that want to train large language models and run generative AI solutions in their compute-intensive data centers. According to technology and consulting firm Jon Peddie Research, Nvidia captured 88% of the AI-GPU market in the first quarter.
Total dominance in the hottest innovation since the Internet took off has its advantages. With demand for the company’s GPUs outstripping supply—even the company’s next-generation Blackwell chip is believed by some Wall Street analysts to sell well into 2025—Nvidia has been able to significantly increase its price points. prices and increase its margins. As of April 28 (the close of Nvidia’s first fiscal quarter), the company’s gross margin reached an almost unbelievable 78.4%.
Nvidia is clearly taking advantage of its first-mover advantage and the fact that the world’s leading chip maker Semiconductor manufacturing in Taiwan has increased its chip-on-wafer-on-substrate capacity to allow Nvidia to progressively sell more of its AI accelerator chips.
But while Nvidia has been effectively perfect on paper, it’s fighting an uphill battle against history, which suggests it will eventually sink by at least 50%, if not more.
Image source: Getty Images.
Over three decades, the story has also been perfect when it comes to other major innovations
As I alluded to earlier, there has been no shortage of trends, technologies and other big innovations that were expected to be the best of bread. Many of these trends have had a trend or two that skyrocketed.
The problem is that all these innovations share a common tendency: a bubble-bursting event. Professional and everyday investors tend to overestimate the adoption and/or utility of new technologies. As a result, these buzzy innovations and trends are effectively set up for failure from the start.
You do not believe me? Let’s take a walk down memory lane…
- Cisco Systems AND Amazon were widely regarded as leaders of the dot-com revolution. When the dot-com bubble burst, Cisco and Amazon lost about 90% of their respective value from their all-time high. Although the Internet, network infrastructure, and e-commerce have been extremely successful, all these innovations needed time to mature.
- Genome decoding companies Celera and Human Genome Sciences burst out of the gate in the late 1990s and delivered stunning returns to investors with the promise of unlocking the secrets of the human genome at a lower cost. But, once again, the technology was not cheap enough, nor ready for mainstream application. Both companies would eventually fall from their record highs before being acquired.
- 3D printing stocks like 3D systems AND Stratasys were all the rage from 2011 to 2013 with the expectation that 3D printing systems would become a hot item for consumers. Unfortunately, this consumer element failed to materialize, resulting in 3D Systems and Stratasys losing roughly 95% of their value.
- Blockchain technology was another hot innovation that, in the mid-2010s, was expected to take Wall Street by storm and revolutionize everything from banking to supply chain tracking. But after many years, blockchain still has minimal utility in the real world. Since cryptocurrencies and blockchain tend to go hand in hand, Coinbase Globaland the nearly 90% drop it suffered illustrates another major trend that burst the bubble.
- Electric vehicles (EVs) were expected to make internal combustion engine vehicles a thing of the past. Although the industry leader Tesla is profitable, demand for EVs has fallen significantly as consumers have become skeptical of the current charging infrastructure landscape. Tesla shares have retreated as much as 75% from their peak.
This list goes on, but I’ll spare you the full catalog of industry-leading companies on supposedly can’t-miss innovations that eventually lose between 50% and 99% of their value.
At no point in the past 30 years has there been another major trend that has avoided a bubble-bursting event. Although Nvidia is perfect on paper, the story has an even longer history of not being wrong.
If that wasn’t enough, Nvidia will face a huge increase in external and internal competition in the current calendar year and next. both Intel AND Advanced Micro Devices are rolling out AI GPUs designed to target Nvidia’s H100 GPU in high-computing data centers. Even if Nvidia’s chips retain a computational edge, the mere presence of these competing GPUs will reduce the shortfall that allows Nvidia to raise the price of its hardware.
Additionally, Nvidia’s top four customers, which account for roughly 40% of its net sales, are developing GPUs for their AI data centers in-house. Even if these chips are merely complementary to the H100 GPUs ordered by Nvidia, it likely signals a peak in reliance on Nvidia products.
While pinpointing a peak is impossible, historical data suggests that Nvidia is eventually will lose more than 50% of its value.
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, Apple, Cisco Systems, Coinbase Global, Nvidia, Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool recommends 3d Systems and Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.