Three decades ago, the internet began going mainstream and kicked off a chain of events that changed the growth trajectory of corporate America forever.
Wall Street has been waiting, sometimes impatiently, for the next-big-thing trend to come along that would rival what the internet did for businesses. After an extensive wait, the artificial intelligence (AI) revolution appears ready to answer the call.
With AI, software and systems are given autonomy to oversee tasks that humans would normally handle. The key to AI’s long-term success, and the source of its seemingly limitless ceiling, is the capacity for AI-driven software and systems to learn without human intervention. Machine learning gives AI the potential to become more proficient at existing tasks, as well as learn new skills.
No company has benefited more directly from the rise of AI than semiconductor goliath Nvidia (NASDAQ: NVDA).
Image source: Getty Images.
The Rise and the Plunge
At the beginning of 2023, Nvidia was sporting a $360 billion market cap, on the verge of becoming one of the most influential technology companies in America. However, by June 20, 2024, just two weeks after completing a historic 10-for-1 stock split, Nvidia’s market cap peaked at $3.46 trillion on an intra-day basis. A surge unseen before – over $3 trillion in less than 18 months.
The catalyst behind this colossal surge was Nvidia’s AI graphics processing units (GPUs), now the standard in high-compute enterprise data centers. Nvidia was responsible for almost all GPUs shipped to these data centers in 2023, creating overwhelming demand. This skyrocketed Nvidia’s adjusted gross margin by nearly 14 percentage points to 78.4% in just five quarters.
Nvidia was on a roll, introducing next-gen platforms like Blackwell and Rubin. The final piece was the increase in chip-fabrication capacity by suppliers, notably Taiwan Semiconductor Manufacturing (NYSE: TSM).
A Peak and a Tumble
Nvidia briefly surged past Microsoft and Apple to become the largest publicly traded company, riding high on Wall Street’s hottest trend. But recent weeks have cast a shadow of imperfection on Nvidia.
To sustain the historic rise, flawless execution was essential. However, reports surfaced that Nvidia would delay the shipment of its Blackwell chip to top clients due to design flaws and capacity constraints at TSMC.
This delay signals Nvidia’s vulnerability and leaves the door ajar for competitors. Advanced Micro Devices (AMD) (NASDAQ: AMD) reported impressive second-quarter results, with data center segment sales soaring 115% year-on-year.
The Rise and Fall of Nvidia: A Lesson in Market Trends
AMD’s recent outperformance in the AI GPU market has cast a shadow over Nvidia’s dominance. This surge in AMD’s performance can be attributed to the successful ramp-up of the MI300X, which is not only cost-effective compared to Nvidia’s H100 but also benefits from Nvidia’s supply backlogs and the delay of the Blackwell chip.
A Shaky Ground for Nvidia
Nvidia’s top customers are now venturing into developing their AI chips, posing a significant threat to Nvidia’s stronghold. While Nvidia still maintains a compute advantage, the risk of losing valuable data center presence looms large as customers opt for internal chip solutions.
History as a Harbinger
Looking back at historical trends, the tech industry has witnessed the rise and fall of multiple next-big-thing innovations. Each bubble, from genome decoding to blockchain technology, eventually bursts, illustrating how investors tend to overestimate the rapid adoption and impact of emerging technologies. This cycle repeats itself every few years, with each innovation needing time to mature and deliver on its promises.
Market leaders behind previous emerging trends have experienced significant declines in value, with peaks to troughs reaching over 80%. Despite these gloomy statistics, Nvidia’s diversified business segments like gaming GPUs and virtualization software offer a cushion against a total collapse. However, the looming cloud of a significant pullback remains imminent as the euphoria surrounding AI begins to fade.
Invest with Caution
Before diving into Nvidia stocks, it’s essential to weigh the risks. The lack of Nvidia in the 10 best stocks list projected by the Motley Fool Stock Advisor team raises red flags. Historical data also highlights exponential returns from other stock picks, indicating potential missed opportunities with Nvidia.
The Stock Advisor service, renowned for its success in guiding investors to substantial returns, has significantly outperformed the S&P 500 since its inception. This track record solidifies the importance of careful stock selection and strategic portfolio management.
As the shadows of uncertainty loom large over Nvidia’s future amidst AI chip innovations and shifting market trends, investors should brace themselves for turbulent times ahead. The lessons from past market bubbles serve as a reminder that no trend, no matter how promising, is immune to the inevitable cycles of innovation and downfall.
