Although it's not a household name yet, anyone who follows the stock market knows at least a little about Nvidia.
The company is the wonder of the year, the stock by which all others are measured. Nvidia's stock has soared since last year as it designs chips that power artificial intelligence, and AI has been hailed as the most important technological development since the Internet.
While I'm not qualified to assess how important or dangerous AI might one day become, I do pay close attention to the stock market. In the stock market he Nvidia's value exceeds his $ 2.2 trillion, making it the world's third largest listed company. The world behind Microsoft and Apple.
Enthusiasm for AI has led to many companies seeing potential for the technology, including not only Nvidia but also Microsoft, Meta, Alphabet, and even other chipmakers such as AMD, Taiwan Semiconductor, and Intel. Stocks of technology companies are also rising.
But given the breakneck momentum in NVIDIA's earnings (up about 290% over the past 12 months), I and many Wall Street analysts wonder how sustainable this performance is. The answer has implications for the entire market.
There are many ways to study this, including traditional stock analysis that considers sales, earnings, cash flow, business growth, and momentum. I took a quirky approach. We asked multiple AI chatbots about his outlook on Nvidia as a stock. Specifically, we asked what NVIDIA's market value would be in 10 years if the company's stock price maintained its current pace.
What they told me was that the surge in NVIDIA stock couldn't last this long. And that message rings broadly true, as much of the stock market is caught up in the same AI-driven stock market frenzy. If the market does not slow down soon, it could expand into a bubble, and all bubbles eventually burst.
On a personal level, I love new technology, but I try not to get too excited about it until I'm sure it will work safely and reliably. As far as I know, AI produces great images and is fun to play with, but it's not reliable or secure (yet).
(The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to AI systems.)
What's inside the quadrillion?
To their credit, all three AI chatbots I asked about are Microsoft Copilot powered by OpenAI's Chat GPT-4. Google Gemini. Anthropic's Claude 3 was reluctant to answer my questions directly.
Each company said it cannot reliably assess stock valuations or predict with even the slightest degree of accuracy how its stocks, or the market as a whole, will perform in the future. I wish human stock analysts would say the same thing.
They all warned me that just because Nvidia's stock is growing rapidly now, it doesn't mean it will continue to grow rapidly or for as long as a decade.
But it forced them to perform basic calculations anyway, so they used 20th century technology to stop them: spreadsheets and calculators.
The chatbot didn't get the same numbers every time, and they never agreed on the details. In my humble assessment, this is another sign that they're not ready for prime time. Do not use it for math homework.
But in this case, the details didn't really matter. Eventually, and with considerable provocation, everyone came to the same basic conclusion. Simple compound arithmetic says that if the company's stock price continues to rise at its current pace, NVIDIA's market capitalization will eventually reach tens of trillions of dollars. dollar.
1 quadrillion dollars is 1 with 15 zeros after it, which is 1 quadrillion dollars in American terminology. (In British English, 1 quintillion is even larger, with 1 plus 24 zeros. I'm using the American definition.)
How big is it? According to the World Bank, the global economy (the size of the combined annual gross domestic product of all countries on Earth) reached $100.88 trillion in 2022. Therefore, if Nvidia continues to grow at its current annual rate, within 10 years it will dwarf the output of the entire known economic world.
Claude 3, an Anthropic AI chatbot, calculated that Nvidia would be a $276,962 trillion company in 10 years at its current growth rate and warned me: Nvidia is many times larger than the entire world economy. ”
Simply put, Nvidia's impressive growth rate over the past year is too high to continue for long. Believing that momentum is eternal, I would be cautious about buying her Nvidia stock or any other stock. What goes up can and will come down someday.
This warning confirms what traditional rating scales tell us. Nvidia's stock price and the price of many stocks are high. They can be justified based on the assumption that their sales and profits will grow at a breakneck pace. But if stock prices rise faster than earnings, market participants will eventually crash.
Remember Apple?
Nvidia is an impressive company. The company's products have a good reputation and demand, generating huge profits that are growing rapidly.
The company's latest earnings report in February included some eye-popping numbers that brought a lot of optimism to the stock market. And in a conversation with Wall Street analysts at the time, NVIDIA CEO Jensen Huang gave Wall Street something exciting to consider. He said the company's technology provides the foundation for a new industrial revolution.
“We are now at the beginning of a new industry where AI-dedicated data centers will process vast amounts of raw data and refine it into digital intelligence,” he said. “Like the alternating current power plants of the last industrial revolution, the Nvidia AI supercomputer is essentially this industrial revolution's AI generation factory.”
He suggested there are limits for the next few years.
But NVIDIA's growth will inevitably slow. It's ridiculous to think that it could be bigger than everything else in the universe.
But it still has the potential to grow rapidly. Some companies have been able to maintain rapid growth over long periods of time.
At various stages since its founding in 1976, Apple has confounded skeptics by regularly claiming that it was too big to continue expanding rapidly. For example, Apple's market capitalization in 2012 was $500 billion, and its stock price rose 68% in just eight months.
At the time, the New York Times cited an analyst who used a spreadsheet rather than a chatbot to assess Apple's prospects. The analyst estimates that if the company grows at just 20% a year over the next 10 years (much slower than its 2012 growth rate), Apple will be worth more than $3 trillion by 2022. I concluded that it would be a possible number. This number is not so far-fetched now.
Apple's market capitalization hasn't reached that point yet, but it's close to it at about $2.7 trillion. Old rival Microsoft, which was much smaller than Apple in 2012, now has a market capitalization of more than $3 billion. These two giants of his have waxed and waned many times, but there's a good chance they'll rise again.
I'm not sure if Nvidia belongs in that exalted category, but it's clear that even if Nvidia isn't bigger than the entire universe, it could become significantly more valuable in the next 10 or 20 years . Then again, maybe not.
It might be similar to Cisco Systems, the most valuable company on the stock market in March 2000. It was the peak of another technology boom: the dot-com bubble. Cisco remains a solid company. The company's products form the backbone of the Internet. However, its market capitalization in 2000 was $567 billion. Now it's about $200 billion.
It will be interesting to see Nvidia's fate unfold. But I don't buy individual stocks because I can't predict what will happen to me or any company over the long term. I don't buy Nvidia, Apple, Microsoft, Cisco, etc.
Instead, I settle for a broad, low-cost index fund that tracks the entire market. These are passive, low-risk bets on the future that do not require stock selection.
If Nvidia grows quickly over the coming years, the overall stock market will likely grow as well, so don't miss it completely. If Nvidia's stock slumps, it's likely that other stocks will recover at some point. That's what's happened for the past 100 years, anyway. The AI boom is a thrilling ride. If it starts to slow down, those who were hedging their bets will be glad they did.
