Three decades ago, the internet began its journey into the mainstream, setting off a corporate transformation that reverberated through the annals of American business history.
On Wall Street, a hunger persisted for the next big trend, one that would rival the seismic impact of the internet. After much anticipation, the dawn of the artificial intelligence (AI) era seems poised to herald a new epoch.
AI, with its promise of autonomous software and systems, capable of tasks traditionally carried out by humans, holds the key to a future where limitless innovation beckons. The ability of AI-driven technology to learn and evolve independently fuels its rise, offering potential for unparalleled advancement in various domains.
Among the beneficiaries of the AI surge, no entity has reaped greater rewards than semiconductor giant Nvidia (NASDAQ: NVDA).
Image source: Getty Images.
Nvidia’s Unblemished Operating Ascent Until Recently
At the outset of 2023, Nvidia boasted a market capitalization of $360 billion, positioning itself on the brink of technology preeminence in America. By June 20, 2024, barely a fortnight post its historic 10-for-1 stock split, Nvidia’s market cap peaked at $3.46 trillion, marking an unprecedented surge in value within 18 months.
The driving force behind this extraordinary leap lies in Nvidia’s AI-based graphics processing units (GPUs), the go-to choice for high-compute enterprise data centers. Industry analysts at TechInsights estimate that Nvidia oversaw all but 90,000 of the 3.85 million GPUs dispatched to enterprise data centers in 2023.
The overwhelming demand for Nvidia’s chips prompted a significant upsurge in the price of its leading AI-accelerating chip, the H100. Over five quarters, the company’s adjusted gross margin expanded by around 13.7 percentage points to an impressive 78.4%.
Nvidia’s hardware primacy in enterprise data centers spurred ongoing innovation. In March, the introduction of the advanced Blackwell platform showcased enhanced compute capabilities across diverse fronts, including generative AI solutions, with reduced energy consumption compared to its forerunner. CEO Jensen Huang’s teaser in June hinted at the imminent launch of the Rubin GPU architecture, leveraging a cutting-edge processor termed “Vera,” slated for a 2026 debut.
The crowning achievement in Nvidia’s operational saga lay in its suppliers ramping up capacities to cater to the overwhelming demand. Taiwan Semiconductor Manufacturing (TSMC), a global chip fabrication leader, elevated its chip-on-wafer-on-substrate (CoWoS) capacity, crucial for integrating high-bandwidth memory in AI-inclined data centers.
Nvidia’s Unprecedented Stumble
The seemingly flawless script that propelled Nvidia to the mantle of Wall Street’s AI zenith briefly eclipsed stalwarts like Microsoft and Apple in market value. However, recent tumultuous weeks have exposed Nvidia’s vulnerability, underscoring its susceptibility akin to any other corporation.
Sustaining its historic ascent necessitated impeccable execution by Nvidia. The imperative lay in surmounting all hardware sales targets, commanding premium prices for its products and software – notably the CUDA platform facilitating large language model development, and timely rollout of its next-generation GPU architecture.
Regrettably, reports surfaced last weekend, revealing Nvidia’s notification to top-tier clients (part of the “Magnificent Seven”) of the postponement of Blackwell chip shipments by at least three months. This delay defers the chip’s delivery to the first quarter of 2025 from an expected arrival later this year.
Evidently, the delay traces back to likely design flaws with Blackwell and capacity constraints at Taiwan Semiconductor (TSMC). Despite TSMC’s commendable efforts in doubling its CoWoS capacity, the increment falls short of meeting Nvidia’s enterprise client demands.
Blackwell’s deferment, the harbinger of Nvidia’s fallibility, not only ushers in uncertainties but also paves the way for the ascension of Nvidia’s competitors.
On July 30, Advanced Micro Devices (NASDAQ: AMD) reported second-quarter operating results lauded by Wall Street and investors alike. AMD’s data center segment sales skyrocketed by 115% compared to the prior-year period, reflecting a 21% sequential quarterly increase.
The Unfolding Nvidia Saga: A Historical Perspective
The Battle of AI GPUs: AMD’s Rise Against Nvidia
March-end quarter reports portrayed AMD’s significant outperformance, with their success attributed to the robust ramp-up of AI GPUs. Specifically, AMD’s MI300X emerges as a formidable competitor due to its substantially lower price point compared to Nvidia’s H100. Despite the compute advantages held by the H100, the backlog in supply for Nvidia’s product, combined with the setback involving the delayed Blackwell chip, casts a brighter spotlight on AMD’s hardware.
The Looming Storm for Nvidia: Historical Precedents and Future Projections
Nvidia finds itself in a precarious position as historical data suggests that a further sell-off may be on the horizon. Over the past three decades, virtually every next-gen trend has experienced a significant decline of 80% or more, following an initial bubble phase. From internet/networking to cryptocurrency, each promising sector saw a substantial downfall after an initial surge. While Nvidia enjoys diversification across various segments such as gaming GPUs and virtualization software, the shadows of previous market leaders’ crashes loom ominously.
Patience is key in volatile markets, as exuberance around new technologies tends to wane, leading to downward spirals. The postponement of Blackwell’s release acts as a harbinger, hinting at a potentially worsening situation for Nvidia in the upcoming periods.
Strategic Considerations for Investors
Before plunging into Nvidia stock, prospective investors should weigh the narrative painted by historical patterns. The acclaimed Motley Fool Stock Advisor experts have pinpointed ten alternative stock options forecasted to yield exponential returns. While Nvidia might not be in their top picks, the recommended stocks have the potential for substantial growth.
The track record of the Stock Advisor service since 2002 speaks volumes, showcasing results that have significantly outperformed the S&P 500 index. Past insights such as the Nvidia inclusion in 2005, where an initial investment of $1,000 would have grown to a staggering $643,212, advocate for a strategic and researched investment approach.
Despite the volatility and historical parallels, the investment decision ultimately pivots on a balanced assessment of risk and reward, foresight, and prudent financial planning.