Nvidia stock has hit a peak, and the first domino to fall will only exacerbate its sales

Three decades ago, the Internet began to go mainstream and set in motion a chain of events that forever changed the growth trajectory of American companies.

Wall Street has been waiting, sometimes anxiously, for the next big thing to come along to rival what the Internet has done for business. After a long wait, the artificial intelligence (AI) revolution seems ready to answer the call.

With artificial intelligence, software and systems are given autonomy to oversee tasks that humans would normally handle. The key to AI’s long-term success and the source of its seemingly limitless ceiling is the ability of AI-based software and systems to learn without human intervention. Machine learning gives AI the potential to become more proficient at existing tasks as well as learn new skills.

No company has benefited more directly from the rise of AI than semiconductor Goliath Nvidia (NVDA -0.21%).

Image source: Getty Images.

Until recently, Nvidia’s operational acceleration was flawless

At the beginning of 2023, Nvidia had a market capitalization of $360 billion, which put it on the verge of being one of the most influential technology companies in America. By June 20, 2024, less than two weeks after the historic close of the 10-for-1 stock split, Nvidia’s market capitalization peaked at $3.46 trillion on an intraday basis. Investors have simply never witnessed a market leader gain more than $3 trillion in value in less than 18 months before.

The catalyst behind this potentially once-in-a-lifetime move is the company’s AI graphics processing units (GPUs), which have become the standard in high-computing enterprise data centers. Semiconductor analysts at TechInsights estimate that Nvidia was responsible for all but 90,000 of the 3.85 million GPUs that were shipped to enterprise data centers in 2023.

Given that demand for the company’s chips is overwhelming, Nvidia has been able to do it dramatic is raising the selling price of its superstar AI-accelerating chip, the H100. Over a period of five quarters, the company’s adjusted gross margin increased by approximately 13.7 percentage points to 78.4%.

Having its hardware take center stage in enterprise data centers has also fueled continued innovation. In March, Nvidia touted its next-generation Blackwell platform as capable of accelerating computing power in a number of areas, including generative artificial intelligence solutions, while consuming less power than its predecessor. Back in June, CEO Jensen Huang teased the debut of his Rubin GPU architecture, which will be powered by a new processor known as “Vera.” Rubin is set to make his debut in 2026.

The last piece of the puzzle for Nvidia’s playbook operational acceleration, so far, has been its suppliers increasing their capacity to meet strong demand. For example, a world leader in chip manufacturing Taiwan Semiconductor Manufacturing (TSM 1.56%) increased its chip-on-wafer-on-substrate (CoWoS) capability, which is a must for high-bandwidth memory packaging in AI-accelerated data centers.

Nvidia is no longer flawless

This seemingly manual “recipe” as the leader of Wall Street’s hottest trend briefly helped Nvidia overtake Microsoft and Apple to become the largest publicly traded company. But after a rough couple of weeks for Nvidia and the stock market as a whole, it’s become clear that Nvidia is just as flawed as any other company.

To maintain its historical development, Nvidia needed to execute flawlessly. It needed to be able to sell through all its hardware, have a top price for its products and software — the CUDA platform, which helps developers build large language models — and maintain its competitive edge by bringing its new generation. GPU architecture for just-in-time commercialization.

Unfortunately, reports surfaced this past weekend that Nvidia informed many of its top customers (all members of the “Magnificent Seven”) that it would be delaying the delivery of the Blackwell chip by at least three months. That would push delivery into the first quarter of 2025 from an estimated arrival date later this year.

According to various reports, the delay stems from potential design flaws at Blackwell as well as capacity constraints at Taiwan Semiconductor (TSMC). Even if TSMC is effectively doubling its CoWoS capacity, it’s still not close enough for Nvidia to meet enterprise customer demand.

Blackwell’s delay is the first domino to fall and signal that Nvidia isn’t perfect. It also opens the door for Nvidia’s competition to thrive.

On July 30, Advanced microdevices (AMD -1.50%) delivered operating results in the second quarter that were welcomed with open arms by Wall Street and investors. AMD’s data center segment sales were up 115% year-over-year and 21% on a sequential quarterly basis (that is, from what was reported for the quarter ended in March). AMD attributed this increased performance to AI GPUs.

In particular, AMD’s MI300X is considerably cheaper than Nvidia’s H100. Even though the H100 holds a number of computational advantages over the MI300X, the pending supply of the H100, coupled with the now-delayed Blackwell chip, gives AMD’s hardware much more shine.

To add, all four of Nvidia’s top customers have developed AI chips for use in their data centers. Even if Nvidia retains its computing advantage, it will lose valuable data center “real estate” as its top customers choose to install its in-house developed (and cost-effective) chips.

Image source: Getty Images.

History suggests that Nvidia’s sales will get worse

To make matters worse, there hasn’t been a single innovation, technology or trend that has escaped an incipient bubble in three decades. Beyond the advent of the Internet, investors watched early bubbles burst in genome decoding, business-to-business trading, housing, Chinese stocks, nanotechnology, 3D printing, blockchain technology, cryptocurrency, cannabis, and the metaverse.

The problem with game-changing innovations and technologies is that investors overestimate their adoption and utility. No matter how large the addressable market, it takes time for new technologies to change the growth landscape for corporate America.

For example, even though most leading companies are spending big on AI-powered data centers, many lack a clear plan on how AI will help them grow their sales and make more money. Investors saw the same story just a few years ago, with the advent of the metaverse and blockchain technology before that. All innovations take time to mature — no exceptions!

Over three decades, the market leaders for each future trend have consistently declined 80% or more in value. On a peak-to-trough basis, the top companies behind internet/networking, 3D printing, genome decoding, cannabis, cryptocurrency and blockchain technology all fell 90% or more before bottoming out.

The bottom line for Nvidia is that it has several established segments beyond its AI GPU operations that can provide a higher footing than what other market leaders faced when their respective bubbles burst. Nvidia GPUs used in gaming and crypto mining, along with its virtualization software, should prevent a total wipe.

However, history is clear that a great withdrawal is in order once the euphoria surrounding the next big thing fades. Blackwell’s delay is the first domino to fall and strongly suggests that Nvidia’s sales will worsen in the coming weeks, months or quarters.