To The Moon

Artificial Intelligence (AI): Next Big Thing

Though there have been numerous next-big-thing trends and highly touted innovations that have attempted to follow in its footsteps, none have come close to matching what the internet did for businesses. The rise of AI is viewed as the most important step forward in innovation since the internet became mainstream. 

The use of software and systems for tasks that would normally be overseen or undertaken by humans, are being given the tools to learn and evolve over time without human intervention, which opens endless possibilities in virtually all sectors and industries. It is estimated that AI would add $15.7 trillion to the worldwide economy by the turn of the decade. This explains why AI juggernaut $NVIDIA Corp(NVDA)$  has been practically unstoppable since 2023 began.

In a little over 17 months, Nvidia's stock has gained more than 700% and tacked on over $2.6 trillion in market value. Last week, the company briefly surpassed Apple to become the second-largest publicly traded company in the US.

Although Nvidia has multiple operating segments, its lightning-quick growth rate has been entirely fueled by the sale of high-powered graphics processing units (GPUs) used in AI-accelerated data centers. Nvidia's H100 GPU has become the go-to choice for businesses wanting to train large language models and run generative AI solutions in their high-compute data centers. 

Utter dominance in the hottest innovation since the internet became mainstream has its advantages. With demand for the company's GPUs handily outpacing supply -- even the company's next-generation Blackwell chip is believed to be sold out well into 2025 -- Nvidia has been able to meaningfully increase its price points and pump up its margins. Notably, the company's gross margin clocked in at an almost unbelievable 78.4%.

However, history has also been flawless when it comes to next-big-thing innovations over last three decades. There have been no shortage of next-big-thing trends, technologies, and innovations that were expected to be the greatest thing sliced bread. Many of these trends have had a leading stock or two that ascended to the heavens.

The problem is that all of these innovations share a common trend: a bubble-bursting event. People tend to have a habit of overestimating the adoption and/or utility of new technologies. As a result, these buzzy innovations and trends are effectively set up for failure from the get-go.

Here's some examples from the past:

• Cisco Systems and Amazon were widely viewed as leaders of the dot-com revolution. When the dot-com bubble burst, Cisco and Amazon shed around 90% of their respective value, relative to their pre-dot-com-bubble all-time high. Although the internet, network infrastructure, and e-commerce have been wildly successful, these innovations all needed time to mature.

• 3D printing stocks like 3D Systems and Stratasys were all the rage from 2011 through 2013 with the expectation that 3D printing systems would become a hot-ticket item for consumers. Unfortunately, this consumer element failed to materialize, resulting in 3D Systems and Stratasys losing close to 95% of their value.

• Electric vehicles (EVs) were expected to make internal-combustion engine vehicles a thing of the past. Even though industry leader Tesla is profitable, EV demand has notably fallen off as consumers have become skeptical of the current landscape of charging infrastructure. Shares of Tesla have backed off as much as 75% from their peak and is currently hovering ~50% of its peak stock price.

At no point over the last 30 years has there been a next-big-thing trend that's avoided a bubble-bursting event. Though Nvidia is flawless on paper, history has an even longer track record of not being wrong. Nvidia is set to face a big-time uptick in external and internal competition in the current and following calendar year. Both $Intel(INTC)$   and $Advanced Micro Devices(AMD)$   are rolling out AI-GPUs designed to target Nvidia's H100 GPU in high-compute data centers. Even if Nvidia's chips retain a compute advantage, the mere presence of these competing GPUs will reduce the scarcity that's allowed Nvidia to ramp up the price of its hardware.

Furthermore, Nvidia's top four customers, which account for approximately 40% of its net sales, are internally developing GPUs for their $C3.ai, Inc.(AI)$   data centers. Even if these chips are just complementary to the H100 GPUs ordered from Nvidia, it likely signals a peak in reliance on Nvidia's products.

Will history repeat itself? Only time will tell.

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