Over the past 30 years, there have been no shortage of next-big-thing trends and innovations to capture the attention of growth-seeking investors. The arrival of the online, genome decoding, business-to-business commerce, the rise of China stocks, 3D printing, cannabis, blockchain technology, and the metaverse, are only among the many examples of game-changing growth trends that fueled the fear-of-missing-out (FOMO) from investors.
In the interim, no next-big-thing innovation exemplifies the FOMO trade quite like artificial intelligence (AI).
Nvidia has grow to be the face of the factitious intelligence (AI) revolution
With AI, software and systems are handling or overseeing tasks that may normally be taken care of by humans. The utilization of machine learning is what allows software and systems to build up recent information and “learn” in order that they will grow to be simpler at their tasks.
Artificial intelligence has presumed utility across almost every sector and industry, which may be why the analysts at PwC expect AI to increase global gross domestic product by a staggering $15.7 trillion come 2030.
No company has directly benefited more from the AI revolution than semiconductor stock Nvidia (NASDAQ: NVDA). Because the beginning of 2023, Nvidia’s market cap has catapulted higher by nearly $2 trillion, with the company closing in on Apple, which is currently the second-largest publicly traded company throughout the U.S.
The fuel stoking the fireplace for Nvidia is the company’s A100 and H100 graphics processing units (GPU), which might be currently the dominant GPUs in high-compute data centers. With demand handily outpacing the availability of A100 and H100 GPUs, Nvidia has enjoyed otherworldly pricing power, which has sent data center sales skyrocketing.
But when there’s anything I’ve learned after investing on Wall Street for 26 years, it’s that if something looks too good to be true, it probably is. Nvidia is also Wall Street’s hottest AI stock without delay, but there are 10 excellent reasons I’d not touch it with a 10-foot pole.
1. There’s a high probability of margin cannibalization
To start with, there’s a strong likelihood that Nvidia could cannibalize its own gross margin since it expands production.
A relatively modest increase in cost of revenue last 12 months makes it pretty clear that pricing power, not an increase in production, drove the vast majority of Nvidia’s data center sales growth. As GPU scarcity wanes — each through an increase in competition and an expansion of Nvidia’s own production — the company’s pricing power should decline. That may be a net-negative for the company’s gross margin.
2. External competition is picking up
Although Nvidia could control 90% or more of AI-accelerated GPU share in 2024, based on analysts at Citigroup, sustaining its share moving forward could prove difficult.
Advanced Micro Devices unveiled its MI300X AI-GPU as a direct competitor to Nvidia in June 2023, with the goal of stepping up production in 2024. Meanwhile, Intel debuted its Gaudi3 AI chip last 12 months, which is targeted at displacing Nvidia’s H100 chips for generative AI software. As AMD and Intel begin the rollout of competing GPUs, Nvidia’s pricing power and market share may very well be expected to fall.
3. Internal competition is a good greater problem
While it’s well-understood that external competition is growing, what won’t be as obvious for investors is that Nvidia’s top customers are potential competitors, too.
In no particular order, Microsoft, Meta Platforms, Amazon, and Alphabet account for roughly 40% of Nvidia’s total sales. Not only are these businesses unlikely to keep up up the extent of AI-GPU buying based on their recent order history, but all 4 are developing AI chips of their very own. There’s probability they are going to not be as reliant on Nvidia come 2025 or 2026.
4. U.S. regulators are restricting shipments to China
A fourth reason I’m not touching Nvidia with a 10-foot pole is because U.S. regulators aren’t doing the company any favors.
On two occasions, regulators have restricted exports of Nvidia’s high-powered GPUs to China, the world’s No. 2 economy. This includes the toned-down A800 and H800 chips Nvidia specifically designed for China after an initial round of export restrictions. Regulators are likely costing Nvidia billions of dollars in sales each quarter.
5. There hasn’t been any insider buying in greater than three years
Over the past three years, Nvidia insiders have been steadily selling their shares. Keep in mind that there are viable reasons to sell stock that usually are not necessarily negative, reminiscent of for tax purposes.
But there’s only one reason insiders buy stock: They expect the value of their shares to increase. The last insider purchase at Nvidia occurred in December 2020. If the company’s executives won’t buy shares of their very own stock, it probably means regularly investors shouldn’t, either.
6. Every next-big-thing investment goes through an early stage bubble
One in all the best reasons to keep up your distance from Nvidia is that history is undefeated — a minimum of in relation to next-big-thing investments. Every top trend/innovation over the past 30 years has worked its way through an initial bubble, without exception.
To be clear, early stage bubbles don’t preclude next-big-thing innovations from succeeding. Despite the incontrovertible fact that some dot-com corporations collapsed throughout the late Nineties and early 2000s, the online proved to be a transformative tool for a number of surviving businesses. AI has the potential to remodel the worldwide economy an identical to the online did. Nevertheless, history suggests that investors have, over again, overestimated the adoption rate of a recent trend or innovation.
7. Businesses lack a concrete game plan for deploying AI solutions
Together with investors having a lengthy track record of incorrectly forecasting the adoption of perceived-to-be game-changing trends, businesses sometimes have terrible track records of game-planning with recent innovations.
For instance, businesses were eager to put money into the metaverse just just just a few years ago without with the flexibility to define the parameters of what “the metaverse” would entail. Without these concrete game plans, metaverse investments sank considerably in 2023.
Although AI has broad application, most corporations lack a concrete blueprint for the way in which it is going to boost their sales and grow profits. It’s a scary reality for a megacap stock like Nvidia that’s added near $2 trillion in market cap in a bit bit over 14 months.
8. Recession indicators are concerning for a cyclical company with a premium valuation
An eighth reason I’d not touch Nvidia stock with a 10-foot pole is because a growing number of money-based metrics and predictive indicators are suggesting a U.S. recession is coming. On the tip of the day, tech stocks like Nvidia are cyclical, and FOMO moves typically require a strong economy.
Just a few of the most-worrisome recession indicators without delay include:
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Only the fifth notable decline in M2 money supply since 1870.
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Only the third drop of a minimum of two% in industrial bank credit since 1973.
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The largest yield-curve inversion in greater than 4 a few years.
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One in all the longest consecutive declines throughout the Conference Board Leading Economic Index (LEI) since its inception.
9. The valuation shouldn’t be sensible
Probably essentially the most common objection to owning Nvidia stock is its valuation. Although its growth rate was off the charts in fiscal 2024 (led to late January), the company’s sequential quarterly sales growth has begun to slow. That makes its valuation of nearly 73 times trailing-12-month (TTM) money flow, as of the closing bell on March 8, 2024, a difficult pill to swallow.
History also serves as a warning. Apart from Amazon and Cisco Systems through the dot-com bubble, no market cap-leading business has had a greater TTM price-to-sales ratio than Nvidia.
10. There are significantly better deals throughout the AI space
The tenth and final reason I’d not touch artificial intelligence stock Nvidia with a 10-foot pole is because there are an abundance of cheaper (and safer) options to get AI exposure without running the danger of getting clobbered by a possible bursting of the AI bubble.
As I recently identified, corporations like Meta Platforms and Baidu are historically inexpensive and guarded against significant downside by their cash-cow foundational operating segments. For many who absolutely want direct exposure to AI infrastructure, you’ll have the ability to get it from the likes of Dell Technologies and Hewlett Packard Enterprises. Each provide customizable AI servers, but trade at a considerably lower multiple to forward-year earnings and TTM sales than Nvidia.
Nvidia has all the hallmarks of being in a bubble.
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10 Reasons I Wouldn’t Touch Artificial Intelligence (AI) Stock Nvidia With a 10-Foot Pole Right Now was originally published by The Motley Idiot