On August 28, this figure from Nvidia will confirm an artificial intelligence (AI) bubble that is in the early stages of bursting

Since the start of 2023, no trend has been more responsible for lifting Wall Street’s major stock indexes to new highs than the rise of artificial intelligence (AI).

The appeal of AI is the long-term ability of software and systems to learn without human intervention. This gives software and AI-based systems the ability to become more efficient at their tasks and potentially evolve to learn new skills. With an addressable market spanning most sectors and industries, analysts at PwC believe AI can add a staggering $15.7 trillion to the global economy by 2030.

While dozens of companies have benefited from the AI ​​revolution, none has been the poster child for success more than the semiconductor giant. Nvidia (NASDAQ: NVDA).

Nvidia leads the next supposed leap forward in business innovation

In short, Nvidia’s H100 graphics processing unit (GPU) has become the core chip used by companies to run generative AI solutions and train large language models (LLMs). With demand growing in supply, Nvidia has had no problem raising the price of its H100 GPUs significantly to between $30,000 and $40,000 per chip, or about two to three times what key rivals charge for center stage hardware of AI data.

The beauty of the higher price points is that they directly benefited Nvidia’s bottom line. Over the last five reported fiscal quarters ended April 28, 2024, the company’s adjusted gross margin increased nearly 14 percentage points to 78.35%.

Nvidia hasn’t been shy about investing for the future either. The next generation of its Blackwell platform, which is scheduled to hit the market next year, will accelerate computing capacity in six areas, including quantum computing and generative AI, and will be more energy efficient than its predecessor. Meanwhile, in June, CEO Jensen Huang briefly teased the new Rubin GPU architecture, which will run on a different processor (known as Vera) and debut in 2026.

The final piece of the puzzle that has helped Nvidia’s market cap grow by more than $2.8 trillion since the start of 2023 is its CUDA platform. This is the software platform that developers use to build LLMs and works hand-in-hand with the company’s leading hardware to keep enterprise customers loyal to its ecosystem of solutions.

While it was a seemingly perfect operating ramp, Wall Street is likely to see just how fallible Nvidia and AI as a technology as a whole are on August 28.

This all-important figure from Nvidia could signal the bursting of the AI ​​bubble

This Wednesday, August 28, Wall Street’s AI darling will lift the hood on its fiscal second quarter operating results.

The story continues

Over the past five quarters, Nvidia has done nothing but defy even the loftiest expectations of analysts. A combination of strong enterprise demand for its AI-GPUs, exceptional pricing power and limited competition has allowed the company to build up a backlog that would make any tech company envious.

However, headline revenue and profit numbers won’t tell the full story on August 28. Even if sales and profits beat analyst consensus, another key figure may herald the end of the AI ​​euphoria. I’m talking about Nvidia’s adjusted gross margin. Nvidia’s “adjusted” gross margin excludes the impact of stock-based compensation, acquisition-related expenses and several other costs.

Following the release of Nvidia’s fiscal first quarter results, Huang and his team provided fiscal second quarter adjusted gross margin guidance of 75.5% (+/- 50 basis points). This guidance implies a decline of 235 to 335 basis points from the first quarter.

While an estimated median decline of 285 basis points in adjusted gross margin might sound like much ado about nothing, given the approximately 1,370 basis points in adjusted gross margin Nvidia has expanded over the past five quarters, the reasons behind of this projected decline are the real concern. .

Nvidia’s computing advantages are unlikely to save it from the inevitable

While demand has undeniably been strong for Nvidia’s H100 GPU, it’s the company’s pricing power that has done most of the heavy lifting. Sales growth easily outpaced cost of revenue growth, signaling that pricing power, fueled by the persistent AI-GPU shortage, is the company’s primary driver.

The problem for Nvidia is that it’s not the only show in town. Advanced microdevices (NASDAQ: AMD) is ramping up production of its MI300X AI-GPUs, which are on average 50% to 75% cheaper than Nvidia’s H100. AMD also hasn’t been hampered by problems with early-stage chipmakers like Nvidia has.

Additionally, Nvidia’s four largest customers by net sales — Microsoft, Meta platforms (NASDAQ: META), Amazonand Alphabet — all develop AI-GPUs in-house for their data centers. Even with these internally developed chips intended for complementary roles, they are ultimately cheaper and more readily available than Nvidia hardware. These companies account for about 40% of Nvidia’s sales, and all signal a reduced future reliance on Wall Street’s AI.

To make matters worse, reports emerged just over two weeks ago that Nvidia’s pricey Blackwell chip would be delayed by “at least three months” due to design flaws and supplier constraints. Nvidia not being able to meet enterprise demand in a timely manner opens the door for AMD, Samsungand Huawei to steal shares.

Nvidia’s biggest increase in gross margin came from AI-GPUs being extremely limited. But as new chips hit the market and the company’s top customers fill their valuable data center “real estate” with in-house chips, Nvidia will inevitably find its impeccable pricing power eroded. The company’s average forecast of a 285 basis point sequential decline in adjusted gross margin is evidence that the AI ​​euphoria is fading.

When the AI ​​bubble bursts, no company is likely to be hit harder than Nvidia

Looking beyond Nvidia’s August 28 report, history is another monkey wrench for the AI ​​revolution.

Since the advent of the Internet three decades ago, there has not been a single innovation, technology or trend with a huge addressable market that avoided an early-stage bubble-bursting event. Without exception, investors always overestimate the use cases and consumer/business adoption of a new technology or trend, ultimately leading to disappointment, fading euphoria, and a blowout event.

Including the Internet, we have followed this evolution with genome decoding, business-to-business trade and networking, housing, Chinese stocks, nanotechnology, 3D printing, cryptocurrency, cannabis, blockchain technology, virtual/augmented reality, and the metaverse.

To add to this, you’ll find that few of the companies building AI data centers have definitive plans for how they will use the technology to increase sales and profits. For example, Meta Platforms is investing more than $10 billion in Nvidia’s H100 GPUs, but has no immediate plans to cash in on those investments in its AI data center.

The simple fact that most companies do not have a clear game plan when it comes to AI makes it clear that we are dealing with the next in a long line of bubbles.

That doesn’t mean artificial intelligence can’t, in the end (key word!), is changing the arc of growth in a big way for corporate America — but there’s no doubt that the technology will take time to mature.

If the AI ​​bubble bursts, as history suggests, there is no company that will be hit harder than Nvidia. Adjusted gross margin next week should confirm that the beginning of this bubble bursting event is underway.

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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Sean Williams has positions in Alphabet, Amazon and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

Prediction: On August 28, this figure from Nvidia will confirm an artificial intelligence (AI) bubble that is in the early stages of bursting was originally published by The Motley Fool