Will Nvidia collapse in the second half of 2024? History weighs and provides a great clue

Unless you’ve been living under a rock for the past year, you’ve probably noticed that the bulls are running wild on Wall Street. While a resilient American economy has certainly played a role, the lion’s share of gains in focused growth Nasdaq Composite and reference point S&P 500 can be attributed to the artificial intelligence (AI) revolution.

In simple terms, AI uses software and systems for tasks that humans would normally oversee or perform. What makes AI special and gives the technology such widespread utility is the ability of these systems to learn over time without human intervention. This could allow AI software and systems to become more adept at tasks and perhaps even evolve to learn new skill sets.

The broad appeal of artificial intelligence excited analysts at PricewaterhouseCoopers (PwC) enough to estimate that this innovative technology could add $15.7 trillion to the global economy by 2030. With such big dollar figures, there’s room for winners many in time.

At the moment, no company is more directly connected to the rise of AI than the semiconductor colossus Nvidia (NVDA -0.36%).

The $64,000 question is: Can Nvidia keep the good times going, or is a potential crash just around the corner?

Nvidia has grown like no market leader before

For a very brief period this month, Nvidia retired the crown Microsoft AND Apple to become the most valuable publicly traded company. That’s no small feat when you consider that Nvidia’s market cap was less than $360 billion when the curtain opened on 2023.

Almost all of Nvidia’s $3 trillion increase in market cap over the past 18 months and its recent need to complete a 10-for-1 stock split have been driven by the popularity of AI-focused graphics processing units (GPUs ). In particular, the company’s H100 GPUs have become the go-to chip for businesses looking to run generative AI solutions and train large language models in high-computing data centers. In terms of compute, Nvidia’s chips are not outdone.

On top of its first-mover advantage, Nvidia counts many of the country’s most influential businesses as its top customers. Microsoft, Meta Platforms, AmazonAND Alphabet account for about 40% of Nvidia’s net sales. It’s a testament to Nvidia that major tech companies are lining up to use its GPUs in their AI-accelerated data centers.

We’re also talking about a company that has enjoyed otherworldly pricing power for its chips. Even with the major chip manufacturing company Semiconductor manufacturing in Taiwan By significantly increasing its chip-to-wafer-to-substrate capacity, which is needed to pack high-bandwidth memory, Nvidia is nowhere near meeting enterprise demand for its GPUs. Higher prices lifted its adjusted gross margin to 78.4% in the fiscal first quarter (ended April 28).

The cherry on top of Nvidia’s probe is that it has held onto its innovative advantages. With external competitors such as Intel AND Advanced Micro Devices aiming to go head-to-head with the H100, Nvidia is preparing to release its next-generation AI GPU architecture known as Blackwell.

Will Nvidia stock crash in the second half of 2024?

On paper, Nvidia can seemingly do no wrong. Wall Street’s artificial intelligence leader has surpassed every revenue and profit forecast set before it for more than a year. However, despite this high performance and plan scaling that we have witnessed, the possibility of Nvidia shares falling in the second half of the year IS within the likely range of results over the next six months.

History is the single biggest factor suggesting that Nvidia has a non-zero chance of falling in the latter half of the year. Specifically, I’m talking about the history of new innovations/technologies and the assessment-based history.

About three decades ago, the spread of the Internet began to change the long-term growth arc of corporate America. While there is no denying that the Internet was a game-changing innovation for businesses, it took time for this technology to mature and for businesses to understand how to use direct-to-consumer channels to generate sales and profits.

Every other big innovation, technology, and trend that has come since the Internet has featured a lot of advertising, big dollar figures, AND a bubble bursting event in its early stages. Whether we’re talking about genome decoding, China stocks, nanotechnology, US housing, 3D printing, cannabis stocks, blockchain technology, the metaverse, or the Internet revolution of the mid-1990s, history ultimately tells us that all trends and technologies young people need time to mature. Artificial intelligence is unlikely to be an exception to this unwritten rule.

Although Wall Street’s top businesses have no qualms about spending heavily on hardware for high-computing data centers, most companies lack a concrete plan for how they will rely on AI to boost sales and profits. theirs. This is consistent with previous innovations of larger things over the previous three decades and provides further evidence for why bubbles occurred in the early stages.

CSCO PS report data according to YCharts. PS ratio = price-sales ratio.

The other story-based issue for Nvidia concerns its valuation. In terms of next year’s earnings multiple and price/earnings-to-growth ratio (PEG ratio), Nvidia isn’t raising any red flags. But pull out its trailing 12-month (TTM) price-to-sales (P/S) ratio and it’s a completely different story.

Before the dot-com bubble burst, Cisco Systemsand Amazon’s TTM P/S ratios peaked in the high 30s to low 40s. Nvidia’s peak TTM P/S ratio occurred just over a week ago at almost the same level (around 42). While history doesn’t repeat itself to a T on Wall Street, it does have a tendency to rhyme. For market-leading businesses, Nvidia is currently in refined (and likely volatile) territory.

Unfortunately, history is not accurate enough to determine when corrections and crashes will occur. While it’s been spot on for three decades when it comes to predicting an eventual bubble-bursting event for the next big innovations and technologies, it’s anything but a guarantee that Nvidia stock will crash during the second half of 2024.

While Nvidia’s AI hardware could be quite successful in the long run, and its market cap could grow significantly, allowing history to be investors’ guide suggests that Nvidia’s path is likely to become more difficult, at least, until the end of 2024.

Randi Zuckerberg, a 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. 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, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon, Intel and Meta platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Cisco Systems, Meta Platforms, Microsoft, Nvidia and Taiwan Semiconductor Manufacturing. 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 January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.