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, an action by which all others are measured. Nvidia designs the chips that power artificial intelligence, and with AI being hailed as the most important technological development since the Internet, Nvidia stock has soared since last year.
I'm not qualified to assess how important (or how dangerous) AI will one day be, but I do pay close attention to the stock market, which values Nvidia at more than $2.2 trillion, making it the No. 3 company. largest public in the world. world behind Microsoft and Apple.
Enthusiasm for AI is driving up the stock prices of not only Nvidia, but also many other tech 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 Nvidia's dizzying profit rate (up about 290 percent over the past 12 months) has me and many Wall Street analysts wondering how sustainable this streak is. The answer has implications for the entire market.
There are many ways to examine this, including traditional stock analysis, which considers sales, earnings, cash flow, business growth, and momentum. I took an unconventional approach: I asked several AI chatbots about Nvidia's prospects as a stock. Specifically, I asked how big Nvidia's market value would be a decade from now if the company's stock price maintained its current pace.
What they told me was this: the sharp rise in Nvidia stock cannot continue like this for long. And with much of the stock market mired in the same AI-driven feverish trading frenzy, the message is broadly true. If the market doesn't slow down soon, it may inflate into a bubble, and all bubbles will eventually burst.
On a personal level, I love new technology, but I try not to get too excited until I'm sure it works safely and reliably. From what I can tell, the AI produces spectacular images and is fun to play with, but it is not reliable or safe (yet).
(The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to artificial intelligence systems.)
What's in a quadrillion?
To their credit, the three AI chatbots I asked: Microsoft Copilot, powered by OpenAI's Chat GPT-4; Google Gemini; and Claude 3 from Anthropic, were reluctant to answer my questions directly.
Each said they could not reliably evaluate stock valuations or predict with the slightest degree of accuracy how a stock or the broader market would perform in the future. I wish human values analysts would say the same.
Just because Nvidia's stock price is growing rapidly now doesn't mean it will continue to grow rapidly, and certainly not for periods as long as a decade, everyone warned me.
But I pushed them anyway to do some basic calculations, which I backed up with 20th-century technology: a spreadsheet and a calculator.
The chatbots didn't always come up with the same numbers and never agreed on the details. That's another sign, IMHO, that they're not ready for prime time. I wouldn't use them for math homework.
But in this case the details didn't really matter. In the end, and with considerable encouragement, they all 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 the current rate, Nvidia will end up with a market capitalization in the trillions. of dollars. Dollars.
Quadrillion is an order of magnitude I'm not comfortable with, so I turned to a dictionary: A quadrillion dollars is 1 followed by 15 zeros, or a quadrillion dollars in American parlance. (In British English, a quadrillion is even larger: 1 with 24 zeros. I'm using the American definition.)
How big is it? The global economy (the combined size of all the annual gross domestic products of all countries on the planet) amounted to $100.88 trillion in 2022, according to the World Bank. So if Nvidia continued to grow at its current annual rate, it would eclipse the output of the entire known economic universe within 10 years.
Claude 3, the Anthropic AI chatbot, estimated that Nvidia, at its current growth rate, would become a $2.76962 trillion company in 10 years, and then warned me: “This is an extraordinarily large number that seems implausible.” In reality, as it would make Nvidia is many times larger than the entire global economy.”
Simply put, Nvidia's astonishing growth rate over the past year is too high to continue for long. I would be cautious about buying Nvidia stock, or any other stock, because I think its momentum is perpetual. What goes up can come down, and at some point it certainly will.
This warning reinforces what traditional valuation measures show. Nvidia's stock price and the prices of many stocks are high. They can be justified under the assumption that their sales and profits will grow at a dizzying rate. But if stock prices rise faster than earnings, the market party will eventually collapse.
Do you remember Apple?
Nvidia is an impressive company. Its products have a high reputation and high demand, and it generates huge profits that are growing rapidly.
Its latest earnings report in February, which sparked tremendous optimism in the stock market, contained surprising numbers. And in a conversation with Wall Street analysts then, Jensen Huang, CEO of Nvidia, gave Wall Street something interesting to ponder. The company's technology is laying the foundation for a new industrial revolution, he said.
“We are now at the beginning of a new industry where dedicated AI data centers process massive raw data to refine it into digital intelligence,” he said. “Like the AC power generation plants of the last industrial revolution, Nvidia's AI supercomputers are essentially the AI generation factories of this industrial revolution.”
The sky is the limit for the next few years, he suggested.
But Nvidia will inevitably start to grow more slowly. It is absurd to think that it can become larger than everything else in the universe.
But it could still grow quickly. Some companies have already managed to sustain rapid long-term growth.
Apple, at various stages since its founding in 1976, has perplexed skeptics who have periodically said it had become too big to continue expanding rapidly. In 2012, for example, Apple's market capitalization 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 just 20 percent annually over the next decade (much slower than its growth rate in 2012), Apple would be worth an impossible figure by 2022: more than $3 trillion. That number doesn't seem crazy now.
Apple's market capitalization hasn't reached that point yet, but it's close: around $2.7 trillion. Its former rival Microsoft, which was much smaller than Apple in 2012, now has a market capitalization exceeding $3 trillion. These two giants have risen and fallen many times and show every possibility of being able to do so again.
I don't know if Nvidia falls into that exalted category, but it's clear that while Nvidia won't be bigger than the entire universe, it could end up being substantially more valuable in the next 10 to 20 years. Then again, maybe not.
It might be more like Cisco Systems, the most valuable company on the stock market in March 2000. That 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 market capitalization in 2000 was $567 billion. Now it's around $200 billion.
It will be fascinating to see how Nvidia's destiny unfolds. But since I can't predict how it or any other company will do in the long term, 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. They are a passive, less risky bet on the future that does not require stock picking.
If Nvidia grows rapidly in the next few years, I won't miss it completely because the overall stock market will probably grow as well. If Nvidia falters, other stocks will likely, at some point, take over. That's what's happened for the last 100 years anyway. The rise of AI is an exciting ride. If it starts to slow, those who have hedged their bets will be glad they did.
