It’s not a household name yet, but anyone who follows the stock market knows at least a little about Nvidia.
The company is the wonder of the year, a stock by which all others are measured. Nvidia designs the chips that make artificial intelligence work, and because artificial intelligence is being hailed as the most important technological development since the internet, Nvidia shares have been soaring since last year.
I’m not qualified to assess how important — or how dangerous — AI will one day become, but I’m paying close attention to the stock market, which values Nvidia at more than $2.2 trillion, making it the world’s third-largest public company behind Microsoft and Apple.
Excitement over artificial intelligence is driving up the share prices of not only Nvidia, but also many other technology companies believed to be imbued with the technology’s potential, including Microsoft, Meta and Alphabet as well as other chipmakers such as AMD, Taiwan Semiconductor and Intel.
But the growing pace of Nvidia’s earnings — an increase of about 290 percent over the past 12 months — has me and many Wall Street analysts wondering how sustainable that path is. The answer has implications for the entire market.
There are many ways to look at this, including traditional stock analysis, which takes into account sales, earnings, cash flow, business growth and momentum. I took an unusual approach: asking several AI chatbots about Nvidia’s prospects as a stock. Specifically, I asked how much Nvidia’s market value would be in a decade if the company’s stock price maintained its current rate.
What they told me was this: Nvidia’s stock rally can’t go on like this for much longer. And because much of the stock market is tied to the same feverish AI-driven stock frenzy, the message is broadly true. If the market doesn’t slow down soon, it may inflate itself into a bubble – and all bubbles eventually burst.
On a personal level, I like new technology, but I try not to get too excited about it until I’m sure it works safely and reliably. From what I can tell, the AI produces spectacular visuals and is fun to play with, but it’s neither reliable nor safe (yet).
(The New York Times sued OpenAI and Microsoft in December for copyright infringement on news content related to AI systems.)
What’s in a quatrain?
To their credit, all three AI chatbots I asked — Microsoft Copilot, powered by OpenAI’s Chat GPT-4; Google Gemini? and Claude 3 of Anthropic — were reluctant to answer my questions directly.
Each said they could not reliably assess stock valuations or predict with any degree of accuracy how a stock or the market as a whole would perform in the future. If only human stock analysts said the same.
Just because Nvidia’s stock price is going up fast now doesn’t mean it will continue to go up fast, and certainly not over periods as long as a decade, everyone warned me.
But I forced them to perform some basic calculations anyway, which I stopped with 20th century technology – a spreadsheet and a calculator.
The chatbots didn’t reach the same numbers every time and never agreed on the details. This is another sign, in my humble opinion, that they are not ready for prime time. I wouldn’t use them for math work.
But in this case, the details didn’t really matter. Eventually, and with considerable prodding, they came to the same basic conclusion: The simple laws of compound arithmetic tell us that if the company’s stock price continues to rise at its current rate, Nvidia will end up with a market cap in the quadrillion. dollars.
Four billion is an order of magnitude I’m not comfortable with, so I resorted to a dictionary: A quarter of a billion dollars is 1 with 15 zeros after it, or one thousand trillion dollars in American parlance. (In British English, a quatrain is even longer: 1 to 24 zeros. I use the American definition.)
How big is this? The world economy — the combined size of all the annual gross domestic products of every country on the planet — will reach $100.88 trillion in 2022, according to the World Bank. So if Nvidia continued to grow at its current annual rate, it would dwarf the output of the entire known economic universe within 10 years.
Claude 3, the Anthropic AI chatbot, calculated that Nvidia, at its current growth rate, would be a $2.76962 quadrillion dollar company in 10 years, then warned me: “That’s an extremely large number that seems improbable in reality, as it would Nvidia is many times larger than the entire global economy.”
In plain English, Nvidia’s phenomenal growth rate over the past year is too high to continue much longer. I’d be cautious about buying Nvidia stock, or any other stock, on the belief that its momentum is sustainable. What goes up can come down and, somewhere down, it definitely will.
This caveat reinforces what traditional valuation measures indicate. Nvidia’s stock price and the prices of many stocks are high. They can justify themselves by assuming that their sales and profits will grow rapidly. But if stock prices rise faster than earnings, the market party will eventually collapse.
Remember Apple?
Nvidia is an impressive company. Its products have a great reputation and are in high demand and generate huge, rapidly growing profits.
Its last earnings report in February, which unleashed wild optimism on the stock market, contained some impressive numbers. And in a conversation with Wall Street analysts at the time, Jensen Huang, Nvidia’s chief executive, gave Wall Street something exciting to think about. The company’s technology provides the foundation for a new industrial revolution, he said.
“We are now at the beginning of a new industry where data centers dedicated to artificial intelligence are processing vast amounts of raw data to refine it into digital intelligence,” he said. “Like the AC power plants of the last industrial revolution, Nvidia’s AI supercomputers are essentially the AI production factories of this industrial revolution.”
The sky is the limit for the next two years, he suggested.
But Nvidia will inevitably start growing more slowly. It is absurd to think that it can become bigger than anything else in the universe.
But it could still grow quickly. Some companies have been able to sustain long-term rapid growth in the past.
Apple, at various stages since its founding in 1976, has confounded skeptics who at times said it had grown too big to continue expanding rapidly. In 2012, for example, Apple’s market value was $500 billion, and its stock price had risen 68 percent in just eight months.
At the time, the New York Times cited an analyst who used a spreadsheet, not a chatbot, to assess Apple’s prospects. The analyst concluded that if the company grew at just 20 percent a year over the next decade — much slower than its 2012 growth rate — Apple would be worth an impossible number by 2022: more than $3 trillion. That number doesn’t seem outlandish now.
Apple’s market cap hasn’t reached yet, but it’s close, at $2.7 trillion. Its old rival Microsoft, which was much smaller than Apple in 2012, now has a market capitalization of more than $3 billion. These two giants have risen and fallen many times and show every prospect of being able to do so again.
I don’t know if Nvidia is in that prominent category, but it’s clear that while Nvidia won’t be bigger than the entire universe, it could end up being much more valuable in the next 10 or 20 years. Then again, it might not be.
It could be more like Cisco Systems, the most valuable company on the stock market in March 2000. This was the peak of another technology boom – the dot-com bubble. Cisco is still a solid company. Its products form the backbone of the Internet. But its capitalization in 2000 was 567 billion dollars. Now, it’s about $200 billion.
It will be fascinating to watch Nvidia’s destiny unfold. But since I can’t predict how the company or any company will do in the long run, I don’t buy individual stocks — not Nvidia, Apple, Microsoft, Cisco, or anything else.
Instead, I settle for broad, low-cost index funds that track the entire market. It is a passive and less risky bet on the future that does not require stock picking.
If Nvidia grows rapidly for the next few years, I won’t lose completely because the overall stock market will likely grow as well. If Nvidia falters, other stocks are likely to pick up the slack at some point. Anyway, that’s what happened in the last 100 years. The AI explosion is an exciting ride. If it starts to slow down, those who have hedged their bets will be glad they did.
