Prediction: Nvidia Can Plunge by Up to 56% in the Second Half of 2024

The glory days of the world’s leading artificial intelligence (AI) company may already be in the rearview mirror.

The first half of 2024 is in the books, and the bulls are still very much in control on Wall Street. The mature stock-driven Dow Jones Industrial Average, benchmark S&P 500, and growth stock-fueled Nasdaq Composite all powered to fresh record-closing highs.

While a number of catalysts are responsible for Wall Street’s gains, much of the credit goes to what’s arguably the hottest trend since the advent of the internet in the mid-1990s. I’m talking about the rise of artificial intelligence (AI).

Multiple humanoid robots typing on laptops while sitting at a long conference room table.

Image source: Getty Images.

The broad scope of AI involves using software and systems to handle tasks that humans would normally undertake or oversee. What gives this game-changing technology such appeal is the ability of AI software and systems to learn without human intervention. The capacity to become more proficient at assigned tasks or perhaps evolve to learn new tasks/jobs gives artificial intelligence utility in most sectors and industries.

As you can imagine, estimates of how much AI can change the growth arc for businesses are all over the map. But according to a report released last year by the analysts at PwC, AI is expected to add $15.7 trillion (yes, with a “t”) to the global economy by the turn of the decade.

With dollar figures this large, it’s easy to understand why AI stocks have been the greatest thing since sliced bread in 2024. But among the vast sea of stocks that have benefited from the AI revolution, Nvidia (NVDA 4.57%) reigns supreme.

The all-important question is: How much longer can Nvidia remain on its pedestal?

If history has its say, Nvidia’s glory days may already be in the rearview mirror.

Nvidia’s operational ramp has been nothing short of textbook

For more than a year, Nvidia has scaled its operations at a level never before seen for an industry-leading business. After reporting $27 billion in full-year sales for fiscal 2023 (ended in late January 2023), Nvidia is expected to report north of $120 billion in revenue for fiscal 2025 (ended in late January 2025).

Its innovative AI-focused graphics processing units (GPUs) have made this rip-roaring sales and profit growth possible. In particular, Nvidia’s H100 GPU has quickly become the standard in AI-accelerated data centers. The analysts at TechInsights recently reported that Nvidia’s chips accounted for 98% of the 3.85 million AI GPUs shipped last year.

Despite its first-mover advantages, this leading AI company isn’t sitting on its hands. While its competition aims to catch up to the H100 GPU, Nvidia plans to roll out its next-generation Blackwell chip later this year. CEO Jensen Huang also recently teased the company’s “Rubin” AI GPU architecture, which is due out in 2026. It would appear that Nvidia isn’t going to have any trouble sustaining its compute advantages.

Furthermore, enterprise demand for AI chips has completely overwhelmed their available supply. This has been music to management’s ears because it’s allowed the company to meaningfully raise the price of its H100 chip. The ongoing scarcity of AI GPUs lifted Nvidia’s adjusted gross margin above 78% in the fiscal first quarter (ended April 28).

But when things seem too good to be true on Wall Street is typically when investors should worry.

A person using a pin to pop a bubble containing a green dollar sign.

Image source: Getty Images.

Shares of Nvidia could tumble as much as 56% by year’s end

This isn’t the first time Nvidia has been the primary beneficiary of a next-big-thing innovation or technological trend. In 2018, shares of the company were riding high thanks to surging prices for cryptocurrencies.

Although not all digital currencies use a proof-of-work (PoW) mechanism to validate transactions on the blockchain, some of the most prominent cryptocurrencies do, such as Bitcoin. Validation with PoW is done via cryptocurrency mining.

Cryptocurrency miners run high-powered GPUs that solve complex equations and verify payments. The first miner to validate a group of transactions, known as a block, receives a block reward (tokens of the digital currency being mined). Nvidia’s GPUs became the go-to hardware for cryptocurrency miners.

But shortly after the cryptocurrency bubble burst, Nvidia quickly gave up a significant portion of its prior gains. Fewer than three months after hitting its next-big-thing innovation peak in October 2018, shares of Nvidia had retraced by 56%!

NVDA Chart

NVDA data by YCharts.

We’ve also witnessed rapid pullbacks play out with other industry-leading businesses when next-big-thing bubbles burst. Following Amazon‘s peak in December 1999, prior to the bursting of the dot-com bubble, it shed two-thirds of its value over the next six months. Cisco Systems plunged by 37% mere months after hitting its dot-com bubble high.

I bring up Amazon and Cisco Systems because these were two industry leaders that traded at the priciest trailing-12-month (TTM) sales valuations before the dot-com bubble burst. On June 20, 2024, when Nvidia hit its all-time high, its TTM price-to-sales ratio was practically identical to Amazon’s and Cisco’s peaks.

The point being that if Nvidia did peak on June 20 at north of $140 per share, the decline from this pedestal is unlikely to be gradual. History has shown that once bubbles burst, industry leaders are taken to the woodshed rather quickly — thus, my prediction that it could lose up to 56% from its high in the second half of 2024.

NVDA PS Ratio Chart

NVDA PS Ratio data by YCharts. PS = price to sales.

But this is only part of the story.

In addition to every next-big-thing innovation or technology undergoing a bubble-bursting event early in its existence, Nvidia is going to face its first real influx of competition. Well-known semiconductor juggernauts Advanced Micro Devices and Intel have respective AI-accelerating chips they’ll be rolling out or ramping up production of during the second half of this year.

Here’s the interesting quirk Nvidia is contending with: Even if its H100 and Blackwell chips maintain clearly identifiable compute advantages, the company is still liable to lose market share. Nvidia is at the mercy of its suppliers, meaning it won’t be able to meet demand for all its customers. This opens the door for AMD and Intel to fill the void.

As I’ve previously pointed out, Nvidia’s top four customers are also developing their own AI GPUs. While these chips are unlikely to outperform Nvidia’s AI GPU architecture, their mere presence signals a desire for the world’s most influential businesses to lessen their reliance on the current AI leader.

Furthermore, the sheer presence of these new AI GPUs taking up valuable AI-accelerated data center space implies that Nvidia’s pricing power is going to ebb over time.

History shows that the fall from grace when next-big-thing bubbles burst isn’t pretty, and Nvidia’s big-time move lower may have already begun.

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 Amazon and Intel. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Bitcoin, Cisco Systems, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.

Source link

About The Author

Scroll to Top