Nvidia is likely overvalued

Alan Cai

June 21, 2024

Since the AI revolution began at the dawn of 2023, various technology companies, both budding and established, have seen their market values and investor confidence balloon to unprecedented levels. The AI boom helped catapult OpenAI investor Microsoft to the #1 most valuable publicly traded company in the world, surpassing Apple and its relatively behind AI strategy. The surge in market interest in tech stocks related to AI is almost certainly a bubble that is bound to pop in the near future. The only question that remains is when the collapse will occur and how high the market caps will soar until then.

The current AI boom closely resembles that of the dot-com bubble over thirty years ago. Back in 2001, many companies were shifting their strategies toward taking advantage of emerging internet technologies as investors became extremely eager to invest in almost anything even closely related to the revolution, regardless of its perceived potential or any losses incurred. The result was a highly volatile market where the stocks rapidly grew in a buying frenzy without any substantial revenue to back it. The result was a rapid subsequent nosedive when billions of capital were erased overnight as many investors, looking at their near-empty accounts, realized that the trading mania was largely unsubstantiated and could not sustain long-term growth.

Most notably, the dot-com bubble featured Cisco Systems, a company that provided the internet servers necessary for the dot-com bubble to operate. In other words, any company that joined the dot-com craze would almost certainly need to purchase Cisco server space in order to function, leading to the hardware company’s prominence during the software bubble. Although Cisco did indeed earn a significant amount of money at the time, the server hosting business quickly developed, allowing competitors to sell space at a much lower rate, ultimately causing the company to reach its current state: a relatively established but slowly declining tech company long past its days of glory and fading into the oblivion. A similar parallel can be drawn to the booming tech company Nvidia today. The graphic processing unit manufacturer and chipmaker provides both hardware and software support to AI industry customers, boosting its revenue and investor confidence. In the first quarter of this year, Nvidia boasted a $60 billion revenue, more than the entire market cap (total company value) of Ford, Honda, and Hilton. Citing neverending orders for high-volume processing units, Nvidia investors have rallied the stock to over $3 trillion, momentarily taking over Apple this year as the second most valuable publicly-traded company after Microsoft (which was itself boosted by AI).

Despite Nvidia’s double-digit growth rate this past month, its bubble threatens to pop every coming quarter. As soon as investors see a hint of slowing growth (which is inevitable given the size of the company and the limited nature of the US money supply), billions, if not trillions will be wiped out.