Nvidia Stock’s Hype Cycle: Why the AI Bubble May Burst Sooner Than You Think

Stocks to sell

Nvidia (NASDAQ:NVDA) CEO Jensen Huang is the business equivalent of Caitlin Clark. By that I mean the performance of Nvidia stock in 2024 has made him a legend. His $79.4 billion fortune makes him the 18th richest person in the world. That wealth is up four-fold in a year.

Huang’s every public utterance is picked through for lessons in excellence. “I hope suffering happens to you,” he says, and we nod in agreement. “If I had to do it all over again I wouldn’t.” But what does this mean for a small equity investor? Nothing good.

Nvidia Stock and Jensen Huang

When a rumor spread April 1 that Nvidia had bought the Xbox brand from Microsoft (NASDAQ:MSFT), reporters began analyzing it before looking at the calendar.

Nvidia’s leadership in AI is now taken for granted. Its Blackwell technology guarantees that artificial general intelligence will be here in a few years.

Huang has made thousands of CEOs into techno-optimists, with tricks like talking robots and brute force computing replacing human intuition.

The company’s recent Developer Conference quickly became an “AI Woodstock,” filled with demonstrations and claims that aren’t in the market yet.

Numbers, Please

Nvidia stock has had a rough time getting over $900/share in the last month for a reason.

Nvidia’s $2.25 trillion valuation is held up by quarterly revenue that tripled in a single year, and profit margins of 72%. Its operating cash flow in 2024 was three times the previous record, and analysts see it doubling again in 2025.

But even given all that, its current valuation is outlandish. It trades at 20 times that expected 2025 revenue, and 16 times the expected fiscal 2026 revenue of $136 billion.

Assume for a moment Nvidia stock can hit the $42/share of earnings estimated by the most optimistic analysts for 2026. You’re paying 21 times those earnings to own the stock right now.

Logic says it’s time to take something off the table.

The Nvidia Hype Cycle

There are signs in the AI community that the brute force AI approach made possible by Nvidia may be sub-optimal.

There are signs that a model with 1 trillion parameters could be analyzed with much less hardware than we once imagined. It turns out bigger isn’t always better.

The signs seen by data scientists aren’t yet being seen by AI analysts. But they are being seen by the Cloud Czars who are Nvidia’s biggest customers. Small models may outperform bigger ones. It’s possible to run an AI model on a phone.

Every emerging technology goes through what Gartner (NYSE:IT) calls a hype cycle. Generative AI is now at the peak of expectations. What analysts should be looking for is an event that starts the “trough of disillusionment.”

That’s a necessary sell-off before we figure out the true value of AI and start making money from it.

The Bottom Line on Nvidia Stock

I know where the trough hit the original Internet bubble, because I was there.

It came on January 10, 2000, when Time Warner “bought” AOL. AOL was so over-valued it owned 55% of the resulting company. At that point Internet asset valuations reached their peak.

They proved out in time. Amazon.Com (NASDAQ:AMZN) hit its 1999 price in 2009 and never looked back. Companies like Alphabet (NASDASQ:GOOG)(NASDAQ:GOOGL) that understood what their business was prospered.

Nvidia stock will, too.

But there’s a hard rain going to fall before that happens. We saw it in 2000, we saw it in 2008, and we saw it in 2022. You don’t want to be in it when the storm hits.

I can’t tell you what event might set it off. Maybe Nvidia really will buy the Xbox. That would do it.

As of this writing, Dana Blankenhorn had LONG positions in NVDA, MSFT, AMZN, and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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