Will Nvidia plummet by 50% (or more)? History provides a very clear answer.

Since the advent of the Internet nearly 30 years ago, there has been no shortage of the next big trend or innovation to create buzz on Wall Street. Examples include genome sequencing, 3D printing, and the Metaverse. But no leap forward in innovation can match the potential of artificial intelligence (AI).

In Sizing the Prize, PwC analysts predict that AI will add $15.7 trillion to global gross domestic product by 2030. The $15.7 trillion market is large enough to accommodate a long list of direct and indirect winners in this space.

But over the past two years, semiconductor giant Nvidia has (NVDA -1.41%) He is the biggest beneficiary of the rise of AI. The million-dollar question is: Will the company’s stock price continue to reflect that?

Even if history has a say, don’t count on it.

Image source: Getty Images.

AI revolution has made Nvidia virtually unstoppable for two years

Since the beginning of 2023, Nvidia’s market value has increased by nearly $3 trillion. While other companies have surpassed the $3 trillion plateau before, including Apple and Microsoft, no company has ever come close to achieving a $3 trillion market value in less than two years.

The obvious catalyst behind Nvidia’s incredible rise is the company’s hardware, which has become the “brains” of high-computing data centers. Nvidia’s H100 graphics processing unit (GPU), commonly referred to as the “hopper,” has captured a near-monopoly share of GPUs deployed by enterprises in AI-powered data centers.

Nvidia continues to win with its innovation as well. The successor Blackwell GPU is designed to increase computational speed in six areas, including quantum computing and generative AI solutions, and is more energy efficient than previous generation chips. Other GPU developers aren’t particularly close to unseating Nvidia in terms of computing speed.

The company is also taking advantage of the overwhelming demand for AI chips and their continued shortage. Nvidia’s Hopper chips cost between $30,000 and $40,000, two to four times the price Advanced Micro Devices is getting for its Insight MI300X AI-GPU. Nvidia is able to command and receive premium prices for its hardware, which helps improve gross margins.

To tie things together, Nvidia’s CUDA software platform acted as a lure to keep customers asking for more. CUDA is a toolkit that developers use to build large language models and maximize the computing potential of Nvidia GPUs. This ensures that corporate clients remain within their product and service ecosystem.

But while things were close to perfect for Nvidia, history suggests they are about to find themselves in an incredibly difficult situation.

Image source: Getty Images.

History gives a very clear picture of what’s next for Nvidia

The long-term prospects for artificial intelligence look bright. As AI-driven software and systems evolve to become more proficient at assigned tasks and learn new skills, this technology will become available to most industries around the world. However, the near-term outlook for AI and Nvidia is less optimistic.

As mentioned earlier, the Internet began changing the growth trajectory of companies for the better about 30 years ago. This enabled businesses to move beyond the storefront, leading to a business-to-business e-commerce revolution.

However, the long-term success facilitated by the Internet did not occur without an early bubble bursting event. The dot-com bubble wiped out many early-stage companies and devalued the Nasdaq Composite Index by nearly 78% on a high-to-low basis.

This may sound like an exaggerated example of Wall Street’s irrational frenzy for the next big innovation, but history has shown us that every innovative technology of the past 30 years and The trend finally (keyword!) worked. Overcoming the initial bubble. Other examples of hot trends that led to bubble bursts, regardless of whether they succeeded or disappeared in the long run, include:

Genome decoding US housing Chinese stocks Nanotechnology 3D printing Electric cars Cannabis Blockchain technology Metaverse

Again, this is not a judgment on the long-term potential of the innovations, technologies, and trends mentioned above, nor is it a prediction of the long-term success or failure of artificial intelligence. This shows that the next big innovation or trend always takes time to mature.

At the moment, the majority of companies are actively investing in AI data centers to gain first-mover advantage. The problem is that most of these companies don’t have concrete ideas on how to leverage AI to generate positive returns from their AI investments. This only supports the idea that investors are overestimating how quickly new innovations will be adopted by consumers and businesses.

When a bubble bursts, the historic peak-to-bottom decline of market leaders in potentially game-changing innovations and trends is not pretty. Former leaders in 3D printing and cannabis have lost 95% to 99% of their value from their respective peaks.

Companies with established businesses fared a little better, but were still hit hard. For example, Meta Platforms generates nearly 98% of its revenue from advertising on market-leading social media sites such as Facebook, Instagram, and WhatsApp. When investors realized that Metaverse would take years to monetize and incur significant upfront costs, Meta’s stock lost nearly 80% of its value on a peak-to-trough basis, and then peaked. Updated.

Like Meta, Nvidia has a number of established business segments, including selling GPUs for PC gaming and cryptocurrency mining, and providing virtualization software. These segments provide a floor for Nvidia to avoid being disrupted like 3D printing and cannabis stocks.

But at the same time, history shows that market leaders have lost nearly 80% of their value, or even more, when early-stage bubbles burst. At the very least, history predicts that Nvidia’s stock price will be cut in half, or even more, in the coming years.