Jun 10, 2024 - Technology

Nvidia's high will eventually come down

2024-09-09-stocks-side-by
Data:Yahoo! Finance; Chart: Tory Lysik/Axios Visuals

The fat profit margins that have fueled Nvidia's phenomenal stock price run-up stem from marketplace bottlenecks that are bound to ease.

Why it matters: Nvidia is the AI revolution's bellwether investment, and whenever it starts going down instead of up, the entire AI market is likely to retrench.

Driving the news: Nvidia split its stock 10-for-one Friday after the market closed.

  • The value of holdings in the company didn't change, but the price of individual shares will now feel more affordable to smaller investors.

By the numbers: Nvidia's $2 trillion valuation looked bubbly about three months ago.

  • The company took 25 years to hit the $1 trillion mark, nine months to hit $2 trillion and a little more than three months to hit $3 trillion.
  • At this rate, $4 trillion could arrive in July.

Yes, but: Nvidia's climb is going to get harder and hit limits, whatever fun speculators have along the way.

  • The company's strength lies in its chokehold over the most powerful chips needed to train and run today's advanced AI services.
  • With both giants like Google and Microsoft and startups like OpenAI, Anthropic and xAI all stockpiling those processors and bidding up their prices, Nvidia can command enormous margins.

That won't last forever. The company's many competitors — including Intel, Qualcomm and Apple — have ramped up their efforts at AI chipmaking in ways that will inevitably fence in Nvidia's growth.

  • The best case for Nvidia and its competitors is that AI demand will keep growing at a mad pace, and all these firms will get to slice up an ever-bigger pie. But there's no guarantee of that.
  • If big AI providers don't solve the technology's many problems — from inaccuracies and "hallucinations" to uncertain consumer demand and long-term fears of runaway AIs — demand for these specialized chips could soften or vanish, and the AI frenzy would stop dead in its tracks.

Something like that happened 25 years ago. Cisco, which sold the routers every company needed to get online, was the Nvidia of the '90s internet boom. Its stock price chart in the late '90s looks very similar to Nvidia's today.

  • From 1998 to 2000, Cisco quintupled in price — and then, from 2000 to 2002, it collapsed, when a hardware glut arrived just as a market downturn dampened demand.

The bottom line: The "sell pickaxes to miners" phase of every tech gold rush is real — but it never lasts that long.

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