Prediction: Artificial intelligence (AI) stock Nvidia will struggle to maintain its trillion-dollar market cap through 2026

Since the Internet took off roughly 30 years ago, there hasn’t been a major technology, innovation, or other trend that has come close to competing with it… until now.

The advent of artificial intelligence (AI) is projected to add $15.7 trillion to the global economy by 2030, according to analysts at PwC. With AI, software and systems are given autonomy over tasks that would normally be supervised or undertaken by humans. The catch is that these systems have the ability to learn and evolve over time without human intervention. The capacity to become more proficient over time makes AI useful in almost every sector and industry.

Although most AI stocks have been unstoppable over the past 18 months, it is Nvidia (NVDA -3.22%) that arguably sits on a pedestal above all others.

Since the start of 2023, Nvidia stock has gained 828%, as of June 19, 2024, with the company adding nearly $3 trillion in market value and undergoing a recent 10-for-1 stock split. In fact, Nvidia sat down Microsoft AND Apple this week to become the world’s largest publicly traded company.

But while short-term catalysts help explain the euphoria surrounding AI and Nvidia, tangible long-term headwinds are mounting that suggest the world’s hottest AI stock is in an irrational bubble that could push it off the trillion-dollar market cap . the club.

The euphoria surrounding Nvidia may be nearing a crescendo

No company has benefited more directly from the AI ​​revolution than Nvidia. The company’s H100 graphics processing units (GPUs) have become, in short, the standard in AI-accelerated enterprise data centers. Nvidia’s hardware is effectively the “brain” behind the decision-making and split-second computing power needed to train large language models and drive generative AI solutions.

Recently, semiconductor analysts at TechInsights released data showing that 3.85 million GPUs were shipped in 2023. Nvidia was responsible for 3.76 million (98%) of these shipments. That makes it easier to understand why the company’s Data Center segment more than quintupled sales in its fiscal first quarter (ended April 28), compared to the year-ago period.

Furthermore, demand has completely outstripped the available supply of AI-GPUs. When demand for a good or service swamps supply, it is normal for the price of that good or service to rise sharply. It’s not uncommon to see H100 GPUs sell for around $30,000, which has pushed Nvidia’s adjusted gross margin to a hot 78.4%!

Nvidia’s first-mover advantage is also helping it on the innovation front. With rivals scrambling to play with the H100, Nvidia has been busy developing its next-generation AI-GPU architecture. It unveiled Blackwell in March, which will begin rolling out in the second half of the current calendar year, as well as Ruby, which was unveiled in June and is expected to roll out in 2026. Based on the calculation, Nvidia’s catch-up could prove challenging for its external competition.

With Nvidia beating Wall Street’s sales and growth expectations for more than a year, it’s understandable why fear of missing out (FOMO) has spread among investors. Unfortunately, the combination of FOMO and other big investment trends has historically been a train wreck waiting to happen.

Nvidia may struggle to remain a trillion dollar company by 2026

The single biggest enemy for Nvidia and its shareholders is history. While history shows that the major stock indexes rise over long periods, it is also quite clear that other major investment trends undergo a maturation process that includes a bubble-bursting event.

Since the mid-1990s, every touted game-changing technology, innovation, or trend has resulted in an early-stage bubble. While not an exhaustive list, this includes the Internet, business-to-business, genome decoding, nanotechnology, housing, China stocks, 3D printing, cannabis, blockchain technology, augmented reality, and the metaverse. Without fail, investors always overestimate the uptake of these game-changing innovations/trends by consumers and businesses, leading to high expectations not being met. It would be foolish (with a small “f”) to expect AI to reverse this trend.

To add fuel to the fire, most businesses lack a plan on how they will use artificial intelligence to increase their sales. While many of America’s most influential businesses are investing in AI solutions because it’s the right thing to do right now, it’s not really moving the needle for most of these businesses (outside of hardware players like Nvidia ). Every technology needs time to mature, and AI is nowhere near being a mature innovation at this stage of the game.

Competition is another obvious problem. Even if Nvidia maintains its GPU computing advantage over its peers, the company seems destined to lose share. Advanced Micro Devices AND Intel both are rolling out their own AI GPUs designed to compete directly with the H100 in AI-accelerated data centers. With supply overwhelming demand for Nvidia’s chips, AMD and Intel should have no problem winning share from eager enterprise customers.

As I’ve pointed out on countless occasions, Nvidia’s competition is also internal. Microsoft, Meta Platforms, AmazonAND Alphabet account for approximately 40% of Nvidia’s net sales.

While it’s great that Nvidia can call the world’s most influential businesses its top customers, it’s equally concerning that Microsoft, Meta, Amazon, and Alphabet are developing AI-GPUs in-house for their respective data centers. Once again, Nvidia could retain its competitive computing advantage and lose if these four companies choose to rely on their chips and reduce their dependence on the largest publicly traded company by market capitalization.

As the sheer number of deployed AI-GPUs grows, the scarcity that has powered the H100’s selling price into the stratosphere will fade. In other words, it’s a scenario where Nvidia’s adjusted gross margin returns to historical rates.

Witnessing similar scenarios unfold multiple times with the next big innovations over the past three decades, it’s logical to expect Nvidia’s FOMO to wear off as well. When it does, which I expect to happen in or before 2026, Nvidia may struggle to remain a trillion dollar company.

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, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. 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. 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, Meta Platforms, Microsoft and Nvidia. 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.