After reaching a peak of $134 per share on July 10, shares of Nvidia (NASDAQ:NVDA) have rolled over to $118.
Nvidia is a great company. It should bring in $80 billion in revenue this year, recording over half as net income. But with a market cap of $2.9 trillion you’re paying 36x sales and 69x earnings to hold Nvidia stock.
It’s time to walk away.
While this is no time to panic, even CEO Jensen Huang is cashing out some of his stake.
That’s because every technology goes through a process Gartner (NYSE:IT) calls the “hype cycle” The launch of OpenAI in November 2022 was the technology trigger. The recent high was the peak of expectations.
What we’re looking at next is the trough of disappointment.
Signs of an NVDA Trough Coming
Nvidia still has a months-long order backlog. But commentary has turned negative. Artificial Intelligence (AI) is a bubble that’s about to burst. Politics is rearing its ugly head.
It’s also clear that Nvidia chips are energy hogs. This means applications must justify their running cost, not just their capital cost.
Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), and Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL) have devoted a huge portion of their capital budgets to Nvidia. But few companies beyond them have reckoned with the energy costs associated with its chips.
Environmentalists worry about the damage from rising fossil fuel use but there’s a bigger problem. Fossil fuels are now more expensive than renewable energy. How will AI pay the bills?
Enterprise software companies committed to AI, including ServiceNow (NASDAQ:NOW), Salesforce.com (NASDAQ:CRM), and Adobe (NASDAQ:ADBE), have already warned of weakness ahead. Customers seem reluctant to pay the higher prices that AI makes necessary. There are exceptions like Palantir (NASDAQ:PLTR), which is primarily a military contractor. But in the civilian world, customers will feel the repercussions.
When will we see this? The Kings of the Cloud are already feeling pressure. About 191,000 tech workers were laid off last year and this year may top it. Even Microsoft is laying off people. If you’re not working in AI, this is a tough time to seek work.
Use Other’s Earnings to Time the Fall
The hard fall for Nvidia stock may come at the end of this month, when the Cloud’s giants report earnings. Microsoft reports on July 30. That’s the bellwether.
But, bears aren’t going to be looking at the numbers for fiscal 2024, which ended in June. They’ll be waiting for the guidance for 2025, especially that related to MSFT’s enterprise AI program, Co-Pilot. Microsoft 365 business premium customers more than double their costs when adding Co-Pilot.
When it comes to Large Language Models (LLMs), the heart of AI, bigger isn’t always a lot better. Critics say ChatGPT 4, the OpenAI flagship, is worse than the version it replaced. It’s fast, but much of its output is sub-optimal.
The Apple (NASDAQ:AAPL) Intelligence announcement, making Siri a serious chatbot while just re-selling ChatGPT capability, was the turning point. The software will be trained on user data and not general data. It will be your social secretary, a new interface. Since that announcement, Apple stock is up 16% and has retaken its position as the world’s most valuable company, with a market cap of $3.44 trillion.
For NVDA, this is bad news: Apple doesn’t need Nvidia to deliver Apple Intelligence.
The Bottom Line
A trough is temporary. AI will evolve and will prove its value. Nvidia will remain a great company. But the costs of AI aren’t being made up by revenue right now, as Sequoia Capital’s David Cohn wrote a month ago.
Nvidia is the front end of the AI revolution. It was first to see the gold rush. Its stock will be the first to fall. I think that fall has already begun.
As of this writing, Dana Blankenhorn had a LONG position in MSFT, NOW, and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
