Nvidia Has Plunged 26% in 6 Weeks — but History Suggests an 80% Drop May Be in Order

For nearly two years, Wall Street has been entrenched in a sensational bull market. In recent weeks, the ageless Dow Jones Industrial Average, broad-based S&P 500, and innovation-fueled Nasdaq Composite all ascended to fresh record-closing highs.

While there are a number of catalysts responsible for pushing the broader market to new heights, including a resilient U.S. economy and better-than-expected operating results for Wall Street’s most-influential businesses, the rise of artificial intelligence (AI) is firmly at the top of the list.

With AI, software and systems oversee tasks that would normally have been assigned to humans. What gives this technology such immense appeal — the analysts at PwC estimate a $15.7 trillion boost from AI to the global economy by 2030 — is the capacity for AI-driven software and systems to learn and evolve without human intervention. Machine learning gives AI utility in pretty much every sector and industry.

When next-big-thing technologies come along, professional and everyday investors aren’t shy about bidding up the valuations of the companies behind them. Without question, no company has benefited more from the AI revolution than Nvidia (NVDA -6.67%).

At its peak, Nvidia’s stock gained more than $3 trillion in market value

Beginning in early 2023, Nvidia’s H100 graphics processing units (GPUs) became the preferred choice for businesses wanting to run generative AI solutions and train large language models. The semiconductor analysts at TechInsights have estimated that Nvidia accounted for all but 90,000 of the 3.85 million GPUs shipped to high-compute data centers last year.

Having a veritable monopoly on the hardware powering decision-making in AI-accelerated data centers is an enviable place to be. With demand for the company’s chips easily outstripping their supply, Nvidia has had no trouble meaningfully increasing the price of its H100 GPUs and pumping up its adjusted gross margin.

Furthermore, Nvidia isn’t sitting on its laurels when it comes to innovation. Even though its H100 GPU has clear compute advantages over its rivals, Nvidia is set to roll out its next-generation GPU platform, known as Blackwell, in the latter-half of this year. In June, CEO Jensen Huang also teased the potential of its Rubin architecture, which is slated to hit the market by 2026. It would appear that Nvidia has a blueprint to retain its compute advantage in AI-accelerated data centers.

This textbook operating expansion allowed Nvidia’s valuation to catapult from $360 billion, when the curtain opened in 2023, to a peak of almost $3.5 trillion on an intra-day basis on June 20. For a brief moment, Nvidia became the most-valuable publicly traded company in the world.

Then the music slowed…

Nvidia’s stock has plunged 26% in six weeks and may be headed much lower

Since peaking at $140.76 on an intra-day basis, shares of Nvidia have plunged by 26% to $103.73, as of the closing bell on July 30. In roughly six weeks, Wall Street’s AI darling has shed in the neighborhood of $900 billion in market value, which is higher than the market cap of 493 out of the 500 companies that comprise the S&P 500.

Although stocks don’t move up or down in a straight line, history suggests that Nvidia may have a lot further to fall.

Over the last three decades, Wall Street has entertained no shortage of perceived-to-be game-changing innovations, technologies, and trends. This includes the advent of the internet, genome decoding, business-to-business commerce, housing, China stocks, nanotechnology, 3D printing, cryptocurrency, blockchain technology, legalized cannabis, augmented/virtual reality, the metaverse, and now artificial intelligence.

Although market leaders for every trend listed above enjoyed parabolic moves higher in the early going, the music and euphoria eventually stopped. While some of these innovations went on to be wildly successful for patient investors (the internet), others flopped and never recovered (3D printing and cannabis).

The key point here is that all new technologies, trends, and innovations need to time to mature. While a $15.7 trillion addressable market probably sounds great on paper, the reality right now is that a majority of businesses lack a game plan for how they’ll utilize AI to generate additional sales and grow their profits.

The one constant for next-big-thing innovations is an overestimation of uptake, adoption, and utility by the investing community — and this includes Wall Street analysts and institutions. Every last trend I mentioned above endured a bubble-bursting event in its early stages, and there’s nothing to suggest that AI won’t follow suit.

Market-leading businesses tied to the advent of the internet, business-to-business commerce, genome decoding, cannabis, and cryptocurrency all plunged around 90%, or more, following the bursting of their respective bubbles. Meanwhile, the face of the metaverse, Meta Platforms (META 4.83%), dipped by 80% before finding its nadir.

Meta Platforms enjoyed a firmer foundation because it had its established social media assets to lean on in the event that the hype surrounding the metaverse disappeared. Meta generates approximately 98% of its revenue from advertising, and no social sites draw anywhere close to the number of daily active users that it can.

Nvidia offers similarities in that it has an established GPU businesses for data centers, gaming, and cryptocurrency miners, along with virtualization software and automotive/robotics solutions. Even if the AI bubble were to burst, these established segments should keep Nvidia’s stock from experiencing a decline of 90% or more, as we witnessed with other next-big-thing innovations.

Nevertheless, history is quite clear that bubble-bursting events are unkind to market leaders behind next-big-thing trends. A decline of 80% for Nvidia isn’t just a possibility — it’s the expectation given what history tell us.

Headwinds are mounting for Wall Street’s AI darling

To make matters worse, history isn’t the only headwind Wall Street’s AI darling is contending with.

Beginning in the second half of this year, Intel is expected to roll out its Gaudi 3 AI-accelerating chip on a wide-scale basis. This coincides with Advanced Micro Devices continuing to up production of its MI300X AI-GPU, which is considerably cheaper than the H100 on a cost basis. Even if Intel’s and AMD’s chips remain inferior, in terms of compute capabilities, Nvidia’s inability to meet overwhelming enterprise demand will open the door for Intel and AMD to fill the void.

Furthermore, Nvidia’s four largest customers by net sales (which are all members of the “Magnificent Seven”) are internally developing AI chips for their respective data centers. Though it’s unlikely these GPUs are going to outperform Nvidia’s, they’re notably cheaper than Nvidia’s chips and will be taking up valuable data center “real estate” in the coming months, quarters, and years. The implication being that Nvidia’s GPU sales to America’s most-influential businesses have peaked.

We’re already seeing evidence that Nvidia’s market share dominance is set to wane. After reporting an adjusted gross margin of 78.35% during the fiscal first quarter (ended April 28), the company guided to an adjusted gross margin of 75.5% (+/- 50 basis points) for the fiscal second quarter. Even though Nvidia’s margins have meaningfully expanded over the last 18 months, the first (forecast) sequential decline since 2022 suggests that the AI scarcity responsible for pushing GPU prices higher is about to dwindle.

It could be just a matter of time before Nvidia loses its trillion-dollar market cap.