When the curtain falls on 2024 in less than two weeks, it will likely mark another great year for Wall Street. Iconography Dow Jones Industrial Averagestandard Standard & Poor’s 500supported by growth Nasdaq Composite Each of them has climbed to multiple record closing levels this year.
Although a combination of factors has lifted Wall Street’s major indexes into uncharted territory, including better-than-expected corporate earnings and stock split euphoria, Donald Trump wins in NovemberThere is nothing that makes a bigger fuss than… Artificial Intelligence (AI) revolution.
The long-term steerable AI market is practically limitless. AI-powered programs and systems can become more efficient at their assigned tasks, and can evolve and “learn” without human intervention. That’s why analysts at PricewaterhouseCoopers estimate that AI will add $15.7 trillion to the global economy by the end of the decade.
In response to this generational opportunity, shares of blue-chip AI companies have soared — and for good reason.
Nvidia (Nasdaq: NVDA) Gaining nearly $2.9 trillion in market cap since the start of 2023, the company’s graphics processing units (GPUs) have become the undisputed top choice in AI-accelerated data centers. Last week he specialized in artificial intelligence network solutions Broadcom It became the 11th publicly traded company in the world to reach $1 trillion in nominal value. Meanwhile, he specializes in AI-based data mining Palantir Technologies (NASDAQ:PLTR) He achieves gains of 1000% during the period of two consecutive years.
These represent just some of the notable technology stocks on Wall Street that have soared on hopes that demand for AI hardware and software will change the corporate landscape.
But while Nvidia and Broadcom’s growth forecasts have knocked even the highest analyst forecasts out of the park, there are reasons to believe the AI bubble will burst in the new year.
Among the catalysts that could halt the near-parabolic rise of AI stocks like Nvidia and Palantir, none stands out more than history. Although history is not a timing tool, it has a strong track record of predicting eventual downsides at market-leading companies regarding the next big innovations.
Nearly 30 years ago, the Internet went mainstream and positively changed the path of business growth forever. However, businesses did not fully understand the benefit of the Internet for many years, which is why we witnessed the dot-com bubble taking shape.
Since the advent of the Internet, we have seen a lot of upcoming technologies, innovations, and trends, including genome decoding, 3D printing, blockchain technology, cannabis, and the metaverse. The problem is that they all suffered a bubble bursting event at an early stage.
To be sure, professional and everyday investors constantly overestimate how quickly a new technology or innovation will be adopted and used. This ultimately leads to disillusionment which causes the market leaders of these next big trends to lose between 80% to 99% of their value.
To be clear, I am in no way suggesting that AI cannot be a game-changing technology. What I’m saying is that all new technologies and innovations need time to mature. The simple fact that most companies cannot develop a clear plan on how to deploy AI to achieve a positive return on their investment is a very good indicator that we are in a bubble.
Another reason the AI bubble may burst in 2025 is the expected solution to the GPU scarcity that sent Nvidia stock into the stratosphere.
Demand for Nvidia’s hardware has been otherworldly, with orders piling up for its H100 GPU, known as the “Hopper”, and its successor, the Blackwell GPU. When demand for a good or service easily exceeds its supply, its price will naturally rise. Earlier this year, Nvidia was asking about $40,000 for its Hopper chip, which is up to a 300% premium on top of what… Advanced micro devices It was targeting Insight MI300X GPUs.
In other words, Nvidia has been able to use the scarcity of AI-GPUs to its advantage to increase the price point of its hardware and increase its gross profit margin to the mid-70% range.
However, I fully expect this scarcity advantage to diminish in the new year. AMD has been rapidly ramping up production of its chips and recently introduced its next-generation MI325X GPU.
In addition, many of Nvidia’s largest customers by net sales are developing AI-GPUs internally for use in their own data centers. Although Nvidia’s chips should still be superior from a computing standpoint, internally developed GPUs will be much cheaper and more accessible. It’s a recipe for Nvidia losing valuable data center real estate, and declining its pricing power and profit margin.
Besides history not being on the side of the AI revolution, it is also possible that the rise of AI will be turned upside down by actions taken by US regulators.
In 2022 and 2023, regulators under the Biden administration announced restrictions on exports of high-power AI chips and chip-related manufacturing equipment to China. This affects major hardware producers such as Nvidia, in addition to the company providing the equipment needed to produce AI solutions. For example, a semiconductor chip manufacturing equipment company L Research It achieved 37% of its revenues from China during the quarter ending in September, and 39% in the previous quarter.
Under President-elect Donald Trump, we are unlikely to see these restrictions eased or lifted. Trump took a tough stance toward the world’s second-largest economy during his first term as president, and this stance is likely to continue when he takes office on January 20.
Additionally, Trump opined that he would impose a 35% tariff on imports into the US from China on day one. This is likely to lead to a trade war that will strain trade relations between the world’s two largest economies and negatively affect sales of artificial intelligence products to China.
The final reason for the AI bubble to burst in 2025 relates to the historically unsustainable valuation premiums currently allocated to market-leading AI stocks.
Over the past 30 years, companies pioneering the next big innovations have often achieved sales that have increased 30 to 40 times over a 12-month period. This is the place Amazon and Cisco Systems It peaked just before the dot-com bubble burst.
In 2024, we see Nvidia lead with a P/S ratio of over 40, while Palantir Technologies is currently pushing its P/S ratio to around 69. Although it is impossible to predict when investor euphoria will fade, history has been quite clear that extended valuations of this magnitude are not sustainable over the long term.
Although companies with sustainable moats, like Nvidia and Palantir, deserve a premium valuation, relative to their peers, price-to-sales ratios of 29 for Nvidia and around 69 for Palantir are meaningless.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams He has jobs at Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Cisco Systems, Lam Research, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has Disclosure policy.
Prediction: The AI bubble will burst in 2025. Here’s why. Originally published by The Motley Fool