When the curtain closes on 2024 in lower than two weeks, it’ll likely represent one other banner 12 months for Wall Street. The long-lasting Dow Jones Industrial Average, benchmark S&P 500, and growth-powered Nasdaq Composite have each ascended to multiple record-closing highs this 12 months.
Though there have been a confluence of things lifting Wall Street’s major indexes to uncharted territory, including better-than-expected corporate earnings, stock-split euphoria, and Donald Trump’s November victory, nothing is creating more buzz than the artificial intelligence (AI) revolution.
The long-term addressable marketplace for AI is practically limitless. Software and systems empowered with AI can grow to be more adept at their assigned tasks, and might evolve and “learn” without human intervention. It’s why the analysts at PwC estimate AI will add $15.7 trillion to the worldwide economy by the turn of the last decade.
In response to this generational opportunity, top-tier AI stocks have soared — and with good reason.
Wall Street’s monumental AI rally may come to a grinding halt in 2025. Image source: Getty Images.
Nvidia(NASDAQ: NVDA) has gained nearly $2.9 trillion in market value because the start of 2023, with the corporate’s graphics processing units (GPUs) becoming the undisputed top alternative in AI-accelerated data centers. Last week, AI networking solutions specialist Broadcom became just the eleventh publicly traded company globally to achieve a $1 trillion nominal valuation. Meanwhile, AI-driven data-mining specialist Palantir Technologies(NASDAQ: PLTR) is nipping on the heels of a 1,000% gain over the trailing-two-year period.
These represent just a few of Wall Street’s distinguished tech stocks which have soared on the expectation that demand for AI hardware and software will change the company landscape.
But while Nvidia’s and Broadcom’s growth forecasts have knocked even the loftiest analyst expectations out of the park, there are reasons to imagine the factitious intelligence bubble will burst in the brand new 12 months.
Among the many catalysts that would halt the nearly parabolic climb AI stocks like Nvidia and Palantir have enjoyed, none stands out greater than history. Although history is not a timing tool, it does have an immaculate track record of forecasting eventual downside in market-leading businesses on the cutting-edge of next-big-thing innovations.
Roughly 30 years ago, the web began going mainstream and positively modified the company growth arc endlessly. Nonetheless, the utility of the web wasn’t fully understood by businesses for a few years, which is why we witnessed the dot-com bubble take shape.
Because the advent of the web, we have witnessed loads of next-big-thing technologies, innovations, and trends, including genome decoding, 3D printing, blockchain technology, cannabis, and the metaverse. The issue is that they’ve all endured an early stage bubble-bursting event.
Without fail, skilled and on a regular basis investors have consistently overestimated how quickly a latest technology or innovation could be adopted and utilized. This eventually results in the frustration that causes market leaders of those next-big-thing trends to lose 80% to 99% of their value.
To be clear, I’m not in any way suggesting AI cannot be a game-changing technology. What I’m saying is that each one latest technologies and innovations need time to mature. The easy indisputable fact that most businesses cannot lay out a transparent plan as to how they’ll deploy AI to generate a positive return on their investment is a reasonably good indicator that we’re in a bubble.
Another excuse the AI bubble can burst in 2025 is as a result of the expected resolution of GPU scarcity that is sent Nvidia’s stock into the stratosphere.
Demand for Nvidia’s hardware has been otherworldly, with orders for its H100 GPU, commonly often known as the “Hopper,” and its successor Blackwell GPU backlogged. When the demand for or service handily outstrips its supply, it’s normal for its price to climb. Earlier this 12 months, Nvidia was commanding around $40,000 for its Hopper chip, which is as much as a 300% premium to what Advanced Micro Devices was netting for its Insight MI300X GPUs.
In other words, Nvidia has been capable of use AI-GPU scarcity to its advantage to extend the value point of its hardware and pump up its gross margin to the mid-70% range.
Nonetheless, I fully expect this scarcity advantage to wane in the brand new 12 months. AMD is rapidly increasing production of its chips and recently introduced its next-generation MI325X GPU.
Moreover, a lot of Nvidia’s top customers by net sales are internally developing AI-GPUs to make use of of their data centers. Although Nvidia’s chips should remain superior from a computing standpoint, these internally developed GPUs are going to be substantially cheaper and simple to access. It is a recipe for Nvidia to lose priceless data center real estate, and for its pricing power and margin to say no.
Image source: Getty Images.
Besides history not being on the AI revolution’s side, the AI rally may be upended due to actions taken by U.S. regulators.
In 2022 and 2023, regulators under the Biden administration announced restriction on exports of high-powered AI chips and chip-related manufacturing equipment to China. This affects leading hardware producers like Nvidia, in addition to the corporate’s providing the equipment to provide AI solutions. For example, semiconductor wafer fabrication equipment company Lam Research generated 37% of its revenue from China in the course of the September-ended quarter, and 39% within the quarter before that.
Under President-Elect Donald Trump, it’s unlikely we’ll see these restrictions eased or lifted. Trump took a hardline stance toward the world’s No. 2 economy during his first term as president, and that is more likely to proceed when he takes office on Jan. 20.
So as to add, Trump has opined that he’d impose a 35% tariff on imports into the U.S. from China on Day One. Greater than likely, that is going to prompt a trade war that strains trade relations between the world’s two-largest economies and adversely affects AI product sales to China.
The ultimate reason the AI bubble will burst in 2025 has to do with historically unsustainable valuation premiums which might be currently being assigned to market-leading artificial intelligence stocks.
Over the past 30 years, businesses on the vanguard of next-big-thing innovations have often topped out at multiple of 30 to 40 times trailing-12-month sales. That is where Amazon and Cisco Systems peaked before the dot-com bubble burst.
In 2024, we have witnessed Nvidia top a price-to-sales ratio (P/S ratio) of greater than 40, while Palantir Technologies is currently pushing a P/S ratio of virtually 69. Even though it’s unimaginable to predict when investor euphoria will fade, history has been crystal clear that prolonged valuations of this magnitude aren’t sustainable over the long term.
Though businesses with sustained moats, akin to Nvidia and Palantir, are deserving of a premium valuation, relative to their peers, price-to-sales ratios of 29 for Nvidia and nearly 69 for Palantir make no sense.
Before you purchase stock in Nvidia, consider this:
The Motley Idiot Stock Advisor analyst team just identified what they imagine are the 10 best stocks for investors to purchase now… and Nvidia wasn’t one among them. The ten stocks that made the cut could produce monster returns in the approaching years.
Consider when Nvidia made this list on April 15, 2005… for those who invested $1,000 on the time of our suggestion, you’d have $799,099!*
Stock Advisor provides investors with an easy-to-follow blueprint for fulfillment, including guidance on constructing a portfolio, regular updates from analysts, and two latest stock picks every month. TheStock Advisorservice has greater than quadrupled the return of S&P 500 since 2002*.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Sean Williams has positions in Amazon. The Motley Idiot has positions in and recommends Advanced Micro Devices, Amazon, Cisco Systems, Lam Research, Nvidia, and Palantir Technologies. The Motley Idiot recommends Broadcom. The Motley Idiot has a disclosure policy.
