Nvidia’s stock correction: 25 years of history can help predict how far the AI ​​giant will fall

While the stock-split mania is well established in 2024, there’s no bigger trend on Wall Street than the rise of artificial intelligence (AI).

The loose definition of AI is the use of software or systems to replace humans in performing certain tasks. What gives this technology such broad potential to span almost every sector and industry of the global economy is the ability of AI-driven software and systems to learn without human intervention. By becoming proficient at existing tasks over time and potentially acquiring new skills, AI could contribute an estimated $15.7 trillion to the global economy by 2030, according to analysts at PwC.

No company has benefited more directly from this breakthrough innovation than the semiconductor giants. NVIDIA (NVDA 0.69%).

Nvidia has been growing at a truly phenomenal pace.

So far in 2023, Nvidia’s stock has risen 668% on a percentage basis, giving it a market capitalization of over $2.4 trillion, as of the close of trading on July 25, 2024. Nvidia also completed a 1-for-10 stock split in June, making the shares nominally more affordable to retail investors.

This surge in Nvidia’s valuation is driven in large part by the company’s graphics processing units (GPUs) becoming a favorite with companies running AI-driven data centers. Estimates vary, but analysts at TechInsights estimate that of the 3.85 million GPUs shipped to data centers last year, Nvidia was responsible for all but 90,000.

With that in mind, Wall Street’s AI darling isn’t coming close to meeting enterprise demand for its chips.When demand for a good or service far exceeds supply, it makes sense that the price of that good or service will rise.Nvidia’s incredible pricing power helped it boost its adjusted gross profits by nearly 14 percentage points over the five quarters ended April 28.

There are also high hopes for Nvidia’s next-generation datacenter hardware. The company’s Blackwell platform, which accelerates computing in six key areas including generative AI solutions, is due to arrive to customers later this year. Its Rubin GPU architecture, which will run on an all-new processor (“Vera”), is due to hit the market by 2026. In other words, Nvidia’s lineup suggests it can remain competitive, at least in terms of computing power.

Despite this textbook expansion for Nvidia, the company’s stock price has plummeted recently.

Image source: Getty Images.

Nvidia is in correction territory. History suggests how far it will fall

As of the close of trading on July 25, NVIDIA’s stock price was $112.28 per share. As mentioned above, this is a 668% increase from January 1, 2023, but the stock price is down 20.2% from the all-time high of $140.76 recorded on June 20. In other words, NVIDIA’s stock price is in a full-scale correction phase.

While there is no forecasting tool or metric that can predict with 100% accuracy where Nvidia’s stock price will bottom, 25 years of history gives us some clear clues about what’s in store for the AI ​​leader in the coming months and quarters.

Over the past 25 years, a succession of hyped technologies and trends have come and gone. While some of these innovations and trends have delivered substantial returns for investors in the long term, most of what is poised to be the next big innovation have one thing in common: the investment community overestimates their adoption and usefulness in their early stages.

While it’s easy to get swept up in grand market figures (e.g., AI will add $15.7 trillion to the global economy by 2030), it’s important to realize that all new technologies and trends need time to mature. While there’s no way to know in advance how long an innovation will take to mature, the fact that most companies lack a clear game plan for AI investments suggests we’re witnessing the next bubble in a long line of bubbles.

AMZN data by YCharts.

More specifically, we find that market leaders in the following trends tend to be hit the hardest by the next big innovation over the next 25 years:

• When the dot-com bubble burst, major e-commerce companies Amazon Networking giants Cisco Systems Each lost roughly 90% of their value from peak to trough.
• While genome-sequencing stocks like Celera and Human Genome Sciences no longer exist (they were acquired years ago), both companies followed in the footsteps of Amazon and Cisco and lost much of their value after the hype around genome sequencing died down.
• While e-commerce and networking are successful investments in the long term, the excitement around 3D printing has faded. After reaching their peak, both 3D Systems and Stratasys They each lost more than 90% of their value..
• Cannabis is not a new technology, but its legalization in Canada was seen as a money-making opportunity for generations. Unfortunately, Canada’s licensed producers Canopy growth Ultimately, it fell 99% from its peak.
• Cryptocurrency Exchanges Coinbase Global The company has served as the stock-based face of the cryptocurrency revolution, and as buzz around cryptocurrencies and blockchain technology died down, its shares plummeted by nearly 90%.
• Meta Platform It ushered in the rise of the Metaverse, a virtual 3D environment where people can interact with each other and build entirely new ecosystems. But the technology needed time to mature, and Meta’s stock eventually fell by about 80% before recovering to new highs.

Based on the next generation of innovations and trends we have witnessed over the past 25 years, when a bubble bursts, market leaders tend to lose 80% or more of their peak market value.

The good news for Nvidia is that before artificial intelligence became the company’s main growth driver, it had multiple established sales channels. These channels included GPUs used for gaming and cryptocurrency mining, professional visualization, automotive/robotics solutions, etc. If the AI ​​bubble bursts, as with every big next-gen trend of the past 30 years, Nvidia is more likely to receive downside support than many of the beaten-down market leaders that came before it.

Still, there is precedent for market-leading stocks to plummet when it becomes clear that a hot technology needs time to mature. At the very least, history shows that Nvidia will lose at least half its value from peak to trough, with the stock dropping to $70, important Disadvantage.

But unless Nvidia is an exception, history suggests its market cap could fall below $1 trillion in the next few years.