Will Nvidia's Stock Price Drop by 50% or More?

Businesses known for spearheading the next big innovations have had mixed results historically. Since the internet emerged around thirty years ago, many exciting trends and breakthroughs have captivated investors and analysts alike. These have included sectors such as genome decoding, 3D printing, and the metaverse. Yet, none have matched the vast potential of artificial intelligence (AI).

According to a report titled Sizing the Prize from PwC, AI is projected to contribute a remarkable $15.7 trillion to the global economy by 2030. This enormous market size means numerous companies could potentially profit from AI technology.

Over the past two years, one company that stands out as a significant beneficiary of the AI boom is the semiconductor giant Nvidia (NVDA). The pressing question now is: "Will Nvidia's share price remain strong?"

If we look at history, the answer may not be in Nvidia's favor.

Nvidia's Descent into AI Dominance

Since the beginning of 2023, Nvidia has added nearly $3 trillion to its market capitalization. While other tech behemoths like Apple and Microsoft have reached similar valuations, none have achieved this level of growth in such a short time.

The main engine driving Nvidia's incredible rise is its hardware, which serves as the core of high-performance data centers. The company's H100 graphics processing unit (GPU), famously known as "Hopper," holds a dominant position in AI data centers across various industries.

Nvidia is continuing its legacy of innovation as well. Its upcoming Blackwell GPU aims to enhance computing capabilities across several key areas, such as quantum computing and generative AI solutions, while also increasing energy efficiency. Other GPU manufacturers are far behind Nvidia in terms of computing power.

Nvidia is adeptly capitalizing on the soaring demand and limited supply for these AI chips. Prices for the Hopper chip are running between $30,000 and $40,000, significantly higher than the $7,500 to $15,000 that Advanced Micro Devices earns for its competing MI300X AI GPUs. Nvidia's ability to command such high prices has bolstered its gross margin.

Additionally, Nvidia's CUDA software platform has created a strong incentive for customers to continue purchasing its products. This software enables developers to build advanced models and make the most of their Nvidia GPUs, ensuring long-term customer loyalty.

However, despite these successes, Nvidia may soon face tough challenges, as history suggests.

Historical Trends Provide Insights for Nvidia's Future

The long-range outlook for AI is bright. This technology promises to improve efficiency in countless industries worldwide. However, the immediate future for AI and Nvidia may not be as optimistic.

About thirty years ago, the arrival of the internet fundamentally changed business operations, facilitating the rise of e-commerce. Yet, this transformative trend underwent its fair share of setbacks, most notably the dot-com bubble that caused numerous companies to collapse and the Nasdaq Composite to lose around 78% of its value.

This serves as a significant reminder that every major technological advancement over the last three decades has eventually gone through a phase of over-valuation followed by a correction. Other examples of technologies that experienced similar cycles include:

• Genome decoding
• U.S. housing market
• Chinese stocks
• Nanotechnology
• 3D printing
• Electric vehicles
• Cannabis
• Blockchain technology
• The metaverse

This observation doesn't imply a negative outlook for AI’s long-term prospects or any of the aforementioned trends. Instead, it highlights that every emerging technology needs a cooling-off period for sustainable progress.

Right now, many companies are investing heavily in AI data centers as they rush to gain an early advantage. The downside is that most of them seem unsure about how to effectively utilize AI to ensure a positive return on investment. This aligns with a frequent pattern of investors misjudging the speed at which new technologies permeate the market.

Historical data indicates that companies at the forefront of new innovations often suffer steep declines in their stock prices during bubble bursts. For example, leaders in 3D printing and cannabis industries saw their stock values plummet by 95% or even 99% from their peak prices.

Companies with established operations often fare a bit better but can still experience significant drops. For instance, Meta Platforms, which generates nearly 98% of its revenue from its advertising business, faced a decline of about 80% in stock value during the readjustment phase after investors realized it would take substantial time and investment to monetize the metaverse.

Nvidia also has well-established segments, such as its GPUs for gaming and cryptocurrency mining. These lines of business are likely to provide some support should the company face a downturn, although historical trends show market leaders typically shed around 80% of their value during the tough periods.

In summary, history suggests it's plausible that Nvidia could see its stock price cut in half, if not more, within the upcoming years.

Nvidia, AI, History