Is Nvidia Going to Plunge 50% (or More)? History Offers a Very Clear Answer.

Since the advent of the internet roughly three decades ago, there has been no shortage of next-big-thing trends and innovations generating buzz on Wall Street. Some examples include genome decoding, 3D printing, and the metaverse. However, no leap forward in innovation has come close to rivaling the addressable potential for artificial intelligence (AI).

In Sizing the Prize, the analysts at PwC forecast that AI would add $15.7 trillion to global gross domestic product by 2030. A $15.7 trillion market is large enough to accommodate a long list of direct and indirect winners in this space.

But over the last two years, there's no question that semiconductor colossus Nvidia (NVDA -1.41%) has the prime beneficiary of the rise of AI. The million-dollar question is, "Will the company's share price continue to reflect it?"

If history gets its say, don't count on it.

The AI revolution has made Nvidia virtually unstoppable for two years

Since the start of 2023, Nvidia has gained close to $3 trillion in market value. While other businesses have crossed the $3 trillion plateau before, including Apple and Microsoft, none have come close to gaining $3 trillion in market value in less than two years.

The clear catalyst behind Nvidia's stunning rally is its hardware, which has become the "brains" of high-compute data centers. Nvidia's H100 graphics processing unit (GPU), which is commonly referred to as the "Hopper," has earned a near-monopoly share of the GPUs deployed by businesses in AI-accelerated data centers.

Nvidia continues to win with its innovation, as well. The successor Blackwell GPU is designed to increase computing speed in six areas, including quantum computing and generative AI solutions, and is going to be more energy-efficient than its predecessor chip. No other GPU developers are particularly close to dethroning Nvidia from the standpoint of computing speed.

The company is using overwhelming demand for AI chips and their ongoing scarcity to its advantage, too. Nvidia's Hopper chip has been commanding a price of $30,000 to $40,000, which is anywhere from double to quadruple the price Advanced Micro Devices has been netting for its Insight MI300X AI-GPUs. Nvidia's ability to ask for and receive a premium price for its hardware has helped to pump up its gross margin.

To wrap things up in a nice bow, Nvidia's CUDA software platform has served as the lure that keeps customers coming back for more. CUDA is the toolkit used by developers to build large language models and maximize the computing potential of their Nvidia GPUs. It ensures that enterprise clients stay within its ecosystem of products and services.

But while things have been close to perfect for Nvidia, history suggests they're about to get incredibly challenging.

History offers a crystal-clear picture of what's to come for Nvidia

The long-term outlook for artificial intelligence appears bright. The ability for AI-driven software and systems to become more proficient at their assigned tasks, as well as evolve to learn new skills, gives this technology utility in most industries around the globe. However, the near-term outlook for AI and Nvidia isn't as rosy.

As noted, the internet began changing the corporate growth trajectory for the better roughly three decades ago. It allowed businesses to move beyond their storefronts, leading to the business-to-businesses e-commerce revolution.

But the long-term success spurred by the internet didn't come without an early stage bubble-bursting event. The dot-com bubble wiped out a number of early stage businesses and slashed nearly 78% off of the Nasdaq Composite on a peak-to-trough basis.

While this might sound like an exaggerated example of irrational exuberance on Wall Street for a next-big-thing innovation, history shows us that every game-changing technology and trend for the last 30 years has, eventually (key word!), worked its way through an early stage bubble. Other examples of buzzy trends that, regardless of whether they succeeded or fizzled out over the long run, resulted in bubble-bursting events include:

• Genome decoding
• U.S. housing
• China stocks
• Nanotechnology
• 3D printing
• Electric vehicles
• Cannabis
• Blockchain technology
• The metaverse

Again, this isn't passing judgment on the long-term potential of any of the above innovations, technologies, or trends, nor does it in any way portend success or failure for artificial intelligence over the long run. What it does show is that all next-big-thing innovations and trends need time to mature -- without exception.

At the moment, a majority of the businesses investing aggressively in their AI data centers are doing so to gain first-mover advantages. The issue is that most of these businesses have no concrete idea how they're going to utilize AI to generate a positive return on their AI investments. This all but confirms the notion that investors have, once again, overestimated how quickly a new innovation will be adopted by consumers and/or businesses.

The historic peak-to-trough decline for market leaders of a potentially game-changing innovation or trend during a bubble-bursting event isn't pretty. Former leaders in 3D printing and cannabis shed anywhere from 95% to 99% of their value from their respective all-time highs.

Companies with established operations fared a bit better, but were still hit hard. For instance, Meta Platforms generates close to 98% of its revenue from advertising on its market-leading social media sites, including Facebook, Instagram, and WhatsApp. When investors came to the realization that monetizing the metaverse would take years and cost quite a bit upfront, shares of Meta lost close to 80% of their value on a peak-to-trough basis before rebounding to fresh record highs.

Similar to Meta, Nvidia has a number of established operating segments, including selling GPUs for PC gaming and cryptocurrency mining, as well as providing virtualization software. These segments provide a floor that should keep Nvidia from getting clobbered like 3D printing and cannabis stocks.

But at the same time, history tells us that market leaders have lost in the neighborhood of 80% of its value, if not more, when the early stage bubble bursts. At the very least, history foreshadows a halving, if not more, in Nvidia's share price in the years to come.