Fear of missing out and upcoming investment trends go hand in hand. Unfortunately, these "ingredients" don't mix well in the long run.
Since the proliferation of the Internet roughly 30 years ago, there hasn't been a major technology, innovation, or trend that has come even remotely close to rivaling it...until now.
The arrival of artificial intelligence (AI) It is projected to add $15.7 trillion to the global economy by 2030, according to PwC analysts. With AI, software and systems gain autonomy over tasks that would normally be supervised or performed by humans. The problem is that these systems have the ability to learn and evolve over time without human intervention. The ability to become more proficient over time makes AI useful in virtually every sector and industry.
Although most AI stocks have been unstoppable over the past 18 months, it is NVIDIA (NVDA -3.22%) which undoubtedly stands on a pedestal above all others.
Image source: Getty Images.
Since 2023 began, Nvidia stock has gained 828%, through June 19, 2024, and the company has added nearly $3 trillion in market value and experiencing a recent 10-for-1 stock split. In fact, Nvidia ousted microsoft and Apple this week to become the world's largest publicly traded company.
But while short-term catalysts help explain the euphoria surrounding AI and Nvidia, tangible long-term headwinds are building that suggest the world's hottest AI stock is in an irrational bubble that could eventually take it out of the trillion-dollar market cap. club.
The euphoria surrounding Nvidia may be reaching a crescendo
No company has benefited more directly from the AI โโrevolution than Nvidia. The company's H100 graphics processing units (GPUs) have, in a short time, become the standard in AI-accelerated enterprise data centers. Nvidia hardware is effectively the โbrainsโ behind split-second decision making and the computational power needed to train large language models and run generative AI solutions.
Recently, semiconductor analysts at TechInsights released data showing that 3.85 million GPUs were shipped in 2023. Nvidia was responsible for 3.76 million (98%) of these shipments. This makes it easier to understand why the company's data center segment grew sales fivefold in the fiscal first quarter (ending April 28), compared to the prior-year period.
Furthermore, demand has completely exceeded the available supply of AI GPUs. When demand for a good or service floods supply, it is normal for the price of that good or service to increase significantly. It's not uncommon to see H100 GPUs sell for around $30,000, which has driven up Nvidia's adjusted price. gross margin at a scorching 78.4%!
Nvidia's first-mover advantages are also helping it on the innovation front. While its rivals try to catch up with the H100, Nvidia has been busy developing its next-generation AI-GPU architecture. He Blackwell presented in Marchwhich will begin rolling out in the second half of the current calendar year, as well as Rubin, which was revealed in June and is expected to launch in 2026. From a computing perspective, capturing Nvidia could prove to be a challenge for its external market. competence.
With Nvidia blowing away Wall Street's sales and growth expectations for more than a year, it's understandable why fear of missing out (FOMO) has gripped investors. Unfortunately, the combination of FOMO and upcoming investment trends has historically been a train wreck waiting to happen.
Image source: Getty Images.
Nvidia could struggle to remain a trillion-dollar company in 2026
The biggest enemy of Nvidia and its shareholders is history. While history shows that major stock indices rise for long periods, it is also quite clear that upcoming investment trends undergo a ripening process that involves a bubble burst event.
Since the mid-1990s, every game-changing technology, innovation, or trend has resulted in an early-stage bubble. While not a complete list, it includes the Internet, business-to-business commerce, genome decoding, nanotechnology, housing, China stocks, 3D printing, cannabis, blockchain technology, augmented reality, and the metaverse. Without a doubt, investors always overestimate the adoption of these revolutionary innovations/trends by consumers and businesses, leading to high expectations not being met. It would be foolish (with a small "f") to expect AI to change this trend.
To add fuel to the fire, most companies lack a plan for how they will use artificial intelligence to increase their sales. While many of America's most influential companies are investing in AI solutions because that's what's hot right now, it's not actually moving the needle for most of these companies (aside from hardware players like Nvidia ). Every technology needs time to mature and AI is nowhere near a mature innovation at this stage of the game.
Competition is another clear problem. Even if Nvidia retains its GPU computing advantages over its peers, the company appears destined to lose share. Advanced Micro Devices and Intel Both are deploying their AI GPUs designed to directly compete with the H100 in AI-accelerated data centers. With demand vastly outstripping supply for Nvidia chips, AMD and Intel should have no problem gaining share from impatient enterprise customers.
How I did it noted on countless occasions, Nvidia's competition is also internal. microsoft, Metaplatforms, Amazonand Alphabet They represent approximately 40% of Nvidia's net sales.
While it's great that Nvidia can call the world's most influential companies its biggest customers, it's equally concerning that Microsoft, Meta, Amazon, and Alphabet are all internally developing AI-enabled GPUs for their respective data centers. One more time, Nvidia can maintain its competitive computing advantage and still lose if these four companies choose to rely on their own chips and reduce their dependence on the largest publicly traded company by market capitalization.
As the number of AI GPUs deployed increases, the shortage that drove the H100's selling price into the stratosphere will diminish. In other words, it is a scenario for Nvidia's adjusted gross margin will return to historical norms.
Having witnessed similar scenarios numerous In times with the next big innovations in the last three decades, it is logical to expect that Nvidia's FOMO will also disappear. When that happens, which I expect to happen in 2026 or sooner, Nvidia could struggle to remain a trillion-dollar company.
Alphabet executive Suzanne Frey 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. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sean Williams He has positions in Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool positions and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long $45 January 2025 calls on Intel, long $395 January 2026 calls on Microsoft, short $35 August 2024 calls on Intel, and short $35 calls on $405 in January 2026 at Microsoft. The Motley Fool has a disclosure policy.
