Since the birth of the internet around 30 years ago, there hasn’t been a technological phenomenon quite like it… until now.

The advent of artificial intelligence (AI) is predicted to inject a staggering $15.7 trillion into the global economy by 2030, as estimated by analysts at PwC. AI empowers software and systems to autonomously handle tasks traditionally managed by humans. The unique feature lies in AI’s ability to learn and progress over time sans human interference. This adaptability positions AI for widespread utility across diverse sectors and industries.

Among the plethora of AI stocks flourishing over the last 18 months, Nvidia (NASDAQ: NVDA) indisputably reigns supreme.

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As of June 19, 2024, Nvidia’s shares have skyrocketed by a whopping 828% since the onset of 2023, culminating in the addition of nearly $3 trillion in market value and a recent 10-for-1 stock split. In a momentous event, Nvidia surpassed Microsoft and Apple this week to claim the title of the world’s largest publicly traded company.

While short-term catalysts elucidate the fervor enveloping AI and Nvidia, perceptible long-term challenges loom on the horizon, hinting that the hottest AI stock globally dwells within an overheated bubble that could potentially oust it from the trillion-dollar market cap echelon.

Nearing a Crescendo: Euphoria surrounding Nvidia

No entity has gleaned more from the AI revolution than Nvidia. The company’s H100 graphics processing units (GPUs) have swiftly etched a niche as the benchmark in AI-accelerated enterprise data centers. Nvidia’s hardware acts as the “brain” powering split-second decision-making and computational prowess essential for training expansive language models and executing generative AI solutions.

Recent data from TechInsights’ semiconductor analysts unveiled that 3.85 million GPUs were shipped in 2023, with Nvidia claiming responsibility for 98%, equating to 3.76 million shipments. This stark dominance elucidates the rationale behind the fivefold surge in sales for Nvidia’s Data Center segment during the fiscal first quarter, ending on April 28, in comparison to the preceding year.

Furthermore, the deluge of demand has surpassed the available supply of AI-GPUs. When demand outstrips supply, prices naturally surge. Instances of H100 GPUs selling for approximately $30,000 have propelled Nvidia’s adjusted gross margin to a scorching 78.4%!

Nvidia’s pioneering edge extends to innovation realms. While competitors endeavor to play catch-up with the H100, Nvidia has been crafting its next-generation AI-GPU architecture. The launch of the Blackwell in March, slated for roll-out in the latter half of the ongoing calendar year, coupled with Rubin’s revelation in June and an anticipated 2026 release, underscores Nvidia’s prowess in a compute sense, making it arduous for rivals to catch up.

With Nvidia consistently surpassing Wall Street’s sales and growth projections for over a year, it’s no surprise that the fear of missing out (FOMO) has gripped investors. Unfortunately, the amalgamation of FOMO and trendy next-big-thing investments has historically led to catastrophic outcomes.

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Challenges Ahead: Nvidia’s Trillion-Dollar Path

The principal adversary for Nvidia and its shareholders is history. While history evidences a long-term upsurge in major stock indexes, it also underscores the customary maturation process of next-big-thing investments, characterized by a bubble-bursting event.

Since the mid-1990s, every vaunted groundbreaking technology, innovation, or trend has invariably led to an early-phase bubble. While not exhaustive, these include the internet, business-to-business commerce, genome decoding, nanotechnology, housing, China stocks, 3D printing, cannabis, blockchain technology, augmented reality, and the metaverse. Investors consistently overestimate the assimilation of these innovative trends by consumers and businesses, resulting in unmet lofty expectations. Anticipating AI to deviate from this trend would be imprudent.

Adding to the conundrum, most businesses lack a concrete blueprint on harnessing artificial intelligence to propel their sales growth. Though several prominent American enterprises are investing in AI solutions due to its trendiness, the majority are not significantly benefiting from this trend (excluding hardware players like Nvidia). Every technology demands time to mature, and at its current phase, AI is far from a mature innovation.

Challenges from Competitors in the Tech Arena

Even with Nvidia’s stronghold on GPU compute advantages, the looming threat of losing market share is a harsh reality. Competitors like Advanced Micro Devices and Intel are aggressively introducing their AI-GPUs to directly rival Nvidia’s H100 in the AI-accelerated data center domain. The growing demand for Nvidia’s chips, coupled with inadequate supply, opens the door for AMD and Intel to seize a significant portion of the market from eager enterprise customers.

Internal Competition and Its Ramifications

Internally, Nvidia faces strong competition from tech giants such as Microsoft, Meta Platforms, Amazon, and Alphabet. These behemoths collectively contribute around 40% of Nvidia’s net sales and are actively developing AI-GPUs for their respective data centers. Should these companies pivot toward their in-house chips, Nvidia’s dominance and profitability could face a severe blow, jeopardizing its position as a market leader.

Market Projections and Margin Concerns

As the deployment of AI-GPUs proliferates, the scarcity that has propelled Nvidia’s H100 selling price to astronomical heights is expected to diminish. Consequently, there is a high likelihood of Nvidia’s adjusted gross margin reverting to historical norms. Drawing from past experiences of hyped innovations losing steam over time, the FOMO around Nvidia is predicted to wane, potentially challenging the company’s trillion-dollar valuation by 2026.

Investor Considerations Amidst the Turbulent Landscape

Investors eyeing Nvidia should carefully ponder the current landscape. While Nvidia boasts influential clients like Microsoft, Meta Platforms, Amazon, and Alphabet, the emergence of internal competition poses a significant risk. Seeking advice from reliable sources like Motley Fool’s Stock Advisor, which has a track record of uncovering promising investment opportunities, can aid investors in navigating the volatile tech market.