Approximately 30 years ago, the advent of the internet and its mainstream proliferation changed the growth arc for American businesses forever. Instead of relying on brick-and-mortar operating models, e-commerce opened doors internationally for businesses of all sizes.
Since this leap forward in the mid-1990s, no shortage of touted innovations, game-changing technologies, and buzzy trends have come along, including genome decoding, business-to-business commerce, U.S. housing, nanotechnology, China stocks, 3D printing, cryptocurrency, blockchain technology, cannabis, augmented/virtual reality, and the metaverse.
However, it's the current next-big-thing -- the rise of artificial intelligence (AI) -- that has Wall Street and investors seeing pie-in-the-sky dollar signs.
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Nvidia is spearheading a $15.7 trillion addressable opportunity with AI
Although estimates vary, as you'd expect from any hot innovation or technology, the analysts at PwC estimate artificial intelligence will add $15.7 trillion to the global economy by 2030 through a combination of productivity improvements and consumption-side benefits. If PwC's forecast is remotely in the ballpark, there would be multiple big-time winners from the AI revolution.
No company has been a more direct beneficiary of the euphoria surrounding Wall Street's next-big-thing innovation than semiconductor kingpin Nvidia (NASDAQ: NVDA) , whose graphics processing units (GPUs) have quickly become the standard in AI-accelerated data centers.
According to the analysts at TechInsights, Nvidia accounted for approximately 98% of the GPUs shipped to data centers in 2022 and 2023. The H100 and its successor GPU architecture, Blackwell, will be counted on to train large language models, oversee generative AI solutions, and make the split-second decisions required of AI software and systems.
In addition to being the preferred provider of the hardware powering high-compute data centers, enterprise demand for Nvidia's chips has overwhelmed supply. Nvidia has been able to increase the price of its chips to anywhere from two to four times that of its competition, which has sent its adjusted gross margin meaningfully higher over the last six quarters.
In many ways, Nvidia's ascent has been a blueprint for other innovators to follow. However, history has a different story tell about what comes next for Wall Street's AI darling.
Caveat emptor : Next-big-thing innovations share this one trait
Most next-big-thing trends on Wall Street promise a large addressable market and the ability for companies directly involved in these innovations, technologies, or trends to benefit. Unfortunately, history has shown the one trait every buzzy trend has shared since the mid-1990s is an early development bubble-bursting event .
It's not uncommon for professional and everyday investors to become wide-eyed with excitement when large dollar figures are thrown around concerning a hot trend. This is what often allows emotions to get in the way of better judgment.
Though some of the next-big-thing trends I mentioned earlier went on to become wildly successful, including the internet and businesses-to-business commerce, every next-big-thing innovation needs time to mature . Without fail, investors overestimate how quickly consumers and/or businesses will adopt a new innovation, technology, or trend, which is what leads to eventual disappointment and the noted bubble-bursting event.
On the surface, it would appear that demand for AI hardware is incredibly strong. Orders for Nvidia's H100 are backlogged, while its Blackwell chips, which are set for initial delivery early next year, are believed to be sold out well into 2025.
Moreover, customizable rack server and storage specialist Super Micro Computer , whose servers incorporate Nvidia's H100 GPU , delivered 110% year-over-year sales growth in the fiscal year ended June 30, and expects another 87% sales growth in fiscal 2025.
But dig beneath the surface-scratching headlines and you'll discover that an overwhelming majority of businesses have little clue how they're going to generate a positive return on their AI investments anytime soon.
For example, Meta Platforms (NASDAQ: META) is spending an estimated $10.5 billion to purchase H100 GPUs from Nvidia without any near-term plans to monetize AI. This is a similar approach we've seen Meta take with its metaverse initiatives. This lack of a game plan demonstrates how early we are in the AI development cycle, and how easy it's going to be for lofty growth expectations to come up short.
Based on what history tells us about next-big-thing innovations, it's not a matter of if , but when the AI bubble bursts .
Image source: Getty Images.
Historic precedent isn't Nvidia's only headwind
The problem for Nvidia's shareholders is that there's more to worry about than just historic precedent.
For instance, competition is going to be coming at Nvidia from all angles moving forward. Even though the H100 and Blackwell GPU platforms are likely to retain their computing advantages over external competitors, these competing chips are notably cheaper and being ramped in production at a time when Nvidia can't meet overwhelming enterprise demand. This is a recipe for Nvidia to cede market share and lose some of its otherworldly GPU pricing power.
And it's not just external competitors that Nvidia has to concern itself with . All four of its top customers by net sales are developing in-house AI-GPUs for use in their data centers. This includes Meta Platforms, which is developing the Meta Training and Inference Accelerator. Even if these top four customers, which collectively account for around 40% of Nvidia's net sales, use their chips in a purely complementary fashion, it'll lessen the chance of Nvidia's hardware finding its way into AI-accelerated data centers.
We also witnessed the first sequential quarterly decline in adjusted gross margin in two years . The 75.1% adjusted gross margin reported during the fiscal second quarter -- a 320-basis-point decline from the April 28-ended quarter -- points to these competitive pressures weighing on Nvidia's pricing power and lessening the AI-GPU scarcity that drove prices higher in the first place.
While it's impossible to precisely predict when the AI bubble will burst and the euphoria will fade, history has an immaculate track record when it comes to next-big-thing innovations over the last three decades. Caveat emptor , Nvidia investors.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sean Williams has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy .
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