Unless you’ve been living under a rock for the past year, you’ve probably noticed that the bulls are running wild on Wall Street. While the resilience of the U.S. economy has certainly played a role, the lion’s share of the gains have come from a policy focus on growth. Nasdaq Composite Index and reference S&P 500 can be attributed to the artificial intelligence (AI) revolution.
Simply put, AI uses software and systems for tasks that humans would normally supervise or undertake. What makes AI special and gives this technology such broad utility is the ability of these systems to learn over time without human intervention. This can allow software and AI systems to become more proficient at certain tasks and perhaps even evolve to learn new skills.
The widespread appeal of AI has analysts at PricewaterhouseCoopers (PwC) excited enough that they estimate that this innovative technology could add $15.7 trillion to the global economy by 2030. With dollar figures As important as they are, there is room for several big winners.
For now, No company is more directly associated with the rise of AI that the colossus of semiconductors Nvidia (NASDAQ:NVDA).
The $64,000 question is: Can Nvidia continue its good times, or is a potential crash imminent?
Nvidia has evolved like no market leader before
For a very brief period this month, Nvidia took the crown from Microsoft And Apple to become the most valuable publicly traded company. This is no small feat when you consider that Nvidia’s market capitalization stood at less than $360 billion when the curtain opened for 2023.
Nearly all of Nvidia’s $3 trillion market cap increase over the past 18 months and the recent need for a 10-for-1 stock split have been fueled by the popularity of its AI-focused graphics processing units (GPUs). In particular, the company’s H100 GPUs have become the go-to chip for companies looking to run generative AI solutions and train large language models in compute-heavy data centers. In terms of computability, Nvidia’s chips have not been outdone.
In addition to its first-mover advantages, Nvidia counts many of the country’s most influential companies among its major customers. Microsoft, Meta-platforms, AmazonAnd Alphabet represent approximately 40% of Nvidia’s net revenue. It’s a testament to Nvidia that major tech companies are lining up to use its GPUs in their AI-accelerated data centers.
We’re also talking about a company that has benefited from supernatural pricing power for its chips. Even with a leading chip manufacturing company Semiconductor manufacturing in Taiwan By dramatically increasing its chip-on-wafer-on-substrate capacity, necessary for high-bandwidth memory packaging, Nvidia is no closer to meeting enterprise demand for its GPUs. The price hike pushed its adjusted gross margin to a staggering 78.4% during the fiscal first quarter (ended April 28).
The cherry on the cake for Nvidia is that it has retained its innovative strengths. With external competitors like Intel And Advanced microsystems In a bid to take on the H100, Nvidia is gearing up to roll out its next-generation AI GPU architecture known as Blackwell.
Will Nvidia Stock Crash in the Second Half of 2024?
On paper, Nvidia doesn’t seem to be able to go wrong. Wall Street’s AI leader has surpassed every revenue and profit forecast it had been presented with for over a year. Yet despite this outperformance and scaling we’ve witnessed, the possibility of a collapse in Nvidia’s stock in the second half of the year still looms large. East within the potential range of results over the next six months.
History is the most important factor that suggests Nvidia has a non-zero chance of collapsing in the second half of the year. Specifically, I’m talking about the next big innovation/technology story and the valuation-based story.
About three decades ago, the proliferation of the Internet began to change the long-term growth arc of American businesses. While there’s no denying that the Internet was a game changer for businesses, it took time for the technology to mature and for companies to understand how they would use direct-to-consumer channels to drive sales and profits.
Every big innovation, technology and trend that has emerged since the advent of the Internet has generated lots of hype, big dollar figures, And an event that bursts bubbles in its early stages. Whether it’s genome decoding, Chinese stocks, nanotechnology, US real estate, 3D printing, cannabis stocks, blockchain technology, the metaverse, or the mid-1990s internet revolution, history shows us conclusively that all new trends and technologies need time to mature. Artificial intelligence is unlikely to be an exception to this unwritten rule.
While Wall Street’s largest firms are investing heavily in hardware for their high-performance data centers, most have no concrete plans for how they will leverage AI to grow sales and profits. This is consistent with previous major innovations over the past three decades and further evidence of why financial bubbles form early.
Nvidia’s other historical problem is its valuation. In terms of its forward earnings multiple and its price-to-earnings-to-growth ratio (PEG ratio), Nvidia doesn’t sound any alarm bells. But if we look at its price-to-sales (P/S) ratio over the last 12 months (TTM), it’s a completely different story.
Before the bursting of the Internet bubble, Cisco Systems” and Amazon’s TTM P/S ratios have peaked in the 30-40% range. Nvidia’s highest TTM P/S ratio occurred just over a week ago at a nearly identical level (around 42). While history doesn’t exactly repeat itself on Wall Street, it does tend to rhyme. For market-leading companies, Nvidia is currently in rarefied (and likely unsustainable) territory.
Unfortunately, history is not always so precise when it comes to pinpointing when corrections and crashes will occur. While it has been very accurate for three decades when it comes to predicting a potential bubble burst for the next big innovations and technologies, there is no guarantee that Nvidia’s stock will collapse over the course of the year. of the second half of 2024.
Even though Nvidia’s AI hardware could see some long-term success and its market capitalization could grow significantly, letting history serve as a guide for investors suggests that Nvidia’s path may become bumpier, at the very least, until the end of 2024.
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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. Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. 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 Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool has positions and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Cisco Systems, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short $405 calls from January 2026 on Microsoft. The Motley Fool has a position in Alphabet, Amazon, Intel and Meta Platforms. disclosure policy.
Will Nvidia collapse in the second half of 2024? History weighs and offers an important clue was originally published by The Motley Fool
