Prediction: Nvidia artificial intelligence (AI) stocks will struggle to maintain its trillion-dollar market cap by 2026 | The motley fool

Since the proliferation of the Internet around 30 years ago, no major technology, innovation or trend has come close to rivaling it…until now.

The advent of artificial intelligence (AI) is expected to add $15.7 trillion to the global economy by 2030, according to PwC analysts. With AI, software and systems gain autonomy over tasks that would normally be supervised or undertaken by humans. The problem is that these systems have the ability to learn and evolve over time without human intervention. The ability to become more proficient over time makes AI useful in almost every sector and industry.

Although most AI stocks have been unstoppable over the past 18 months, it is Nvidia (NVDA -3.22%) which undoubtedly sits on a pedestal above all others.

Since the start of 2023, Nvidia shares have gained 828% as of June 19, 2024, as the company added nearly $3 trillion in market value and recently underwent a 10-for-1 stock split. In fact, Nvidia reversed Microsoft And Apple this week to become the world’s largest publicly traded company.

But while short-term catalysts help explain the euphoria surrounding AI and Nvidia, tangible long-term headwinds are mounting, suggesting that the world’s hottest artificial intelligence stock is in a irrational bubble which could, in the long term, push it out of the trillion-dollar market capitalization. club.

The euphoria around Nvidia may be close to a crescendo

No company has benefited more directly from the AI ​​revolution than Nvidia. The company’s H100 graphics processing units (GPUs) have quickly become the standard in AI-accelerated enterprise data centers. Nvidia’s hardware is actually the “brains” behind the split-second decision-making and computing power needed to train large language models and run generative AI solutions.

Recently, semiconductor analysts at TechInsights released data showing that 3.85 million GPUs were shipped in 2023. Nvidia was responsible for 3.76 million (98%) of those shipments. This provides insight into why the company’s Data Center segment more than quintupled its sales during the fiscal first quarter (ended April 28), compared to the year-ago period.

Additionally, demand has completely exceeded the available supply of AI GPUs. When demand for a good or service overwhelms supply, it is normal for the price of that good or service to increase significantly. It’s not uncommon to see H100 GPUs selling for around $30,000, which has brought Nvidia’s adjusted gross margin to a scorching 78.4%!

Nvidia’s advantages as a first mover also help it on the innovation front. While its competitors try to catch up on the H100, Nvidia has been busy developing its next-generation AI-GPU architecture. It unveiled Blackwell in March, which will begin rolling out in the second half of the current calendar year, as well as Rubin, which was revealed in June and is expected to be released in 2026. On a calculative basis, catching up with Nvidia could s prove a challenge for its external competitors.

While Nvidia has been blowing the doors off Wall Street’s sales and growth expectations for over a year, we understand why the fear of missing out (FOMO) has gripped investors. Unfortunately, the combination of FOMO and the next big investing trends has always been a disaster waiting to happen.

Nvidia may struggle to remain a billion-dollar company by 2026

The biggest enemy of Nvidia and its shareholders is history. Although history shows that major stock indexes rise over long periods of time, it is also clear that the most important investment trends undergo a maturation process that involves the bursting of a bubble.

Since the mid-1990s, every technology, innovation, or trend touted as a game-changer has resulted in an early-stage bubble. Although not an exhaustive list, it includes the Internet, business-to-business commerce, genome decoding, nanotechnology, housing, Chinese stocks, 3D printing, cannabis, blockchain technology, augmented reality and the metaverse. It is a surefire fact that investors always overestimate the adoption of these breakthrough innovations/trends by consumers and businesses, leading to lofty expectations not being met. It would be foolish (with a small “f”) to expect AI to change this trend.

To add fuel to the fire, most businesses don’t know how they are going to use artificial intelligence to increase their sales. While many of America’s most influential companies are investing in AI solutions because it’s the hottest thing to do right now, it doesn’t really move the needle for the majority of these companies ( outside of hardware players like Nvidia). Every technology needs time to mature, and AI is far from a mature innovation at this stage of the game.

Competition is another obvious problem. Even if Nvidia maintains its GPU computing advantages over its peers, the company appears destined to lose share. Advanced microsystems And Intel are both deploying their AI GPUs designed to directly compete with the H100 in AI-accelerated data centers. With largely overwhelming demand for Nvidia chips, AMD and Intel should have no trouble gaining share from eager enterprise customers.

As I’ve pointed out many times, Nvidia’s competition is also internal. Microsoft, Metaplatforms, AmazonAnd Alphabet represent approximately 40% of Nvidia’s net revenue.

While it’s fantastic that Nvidia can consider the world’s most influential companies as its primary customers, it’s equally concerning that Microsoft, Meta, Amazon, and Alphabet are developing AI GPUs in-house for their respective data centers. Once again, Nvidia can maintain its competitive advantage in computing and still lose if these four companies choose to rely on their own chips and reduce their dependence on the largest publicly traded company in terms of market capitalization.

As the number of AI GPUs deployed increases, the scarcity that drove the sale price of the H100 into the stratosphere will diminish. In other words, this is a scenario in which Nvidia’s adjusted gross margin returns to historical norms.

Having witnessed similar scenarios many With the major innovations of the last three decades, it’s logical to expect Nvidia’s FOMO to disappear as well. When that happens, which is expected to happen by 2026 or earlier, Nvidia may struggle to remain a multibillion-dollar company.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. Sean Williams holds positions at Alphabet, Amazon, Intel and Meta Platforms. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia. 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 in January 2026 on Microsoft. The Motley Fool has a disclosure policy.