When the curtain closes on 2024 in less than two weeks, it will likely represent another banner year for Wall Street. symbol Dow Jones Industrial AverageBenchmark S&P 500and development-driven Nasdaq Composite Each has climbed to multiple record-setting highs this year.
However, there has been a confluence of factors that have pushed Wall Street’s major indexes into unfavorable territory, including better-than-expected corporate earnings, stock-split prosperity and Donald Trump’s November victoryNothing is creating more buzz Artificial Intelligence (AI) revolution
The long-term addressable market for AI is practically limitless. Software and systems empowered with AI can become more adept at their assigned tasks, and can evolve and “learn” without human intervention. This is why analysts at PwC estimate that AI will add $15.7 trillion to the global economy by the end of the decade.
In response to this generational opportunity, high-end AI stocks have soared — and with good reason.
Wall Street’s monumental AI rally may stall in 2025. Image source: Getty Images.
nvidia(NASDAQ: NVDA ) With a market value of $2.9 trillion since the start of 2023, the company’s graphics processing units (GPUs) have become the undisputed top choice in AI-accelerated data centers. Last week, AI networking solutions experts Broadcom Becomes only the 11th publicly traded company globally to reach a nominal valuation of $1 trillion. Meanwhile, AI-driven data-mining experts Palantir Technologies(NASDAQ: PLTR ) Hot on the heels of a 1,000% increase over the past-two-year period.
These represent some of Wall Street’s top tech stocks that have soared on hopes that demand for AI hardware and software will transform the corporate landscape.
But while growth forecasts from Nvidia and Broadcom have knocked even the loftiest analyst expectations out of the park, there are reasons to believe that the artificial intelligence bubble will burst in the new year.
Among the catalysts that halt the almost parabolic climb AI stocks have enjoyed, none more so than history. While history is not a timing tool, it has an unparalleled track record of predicting the eventual decline of market-leading businesses on the cutting edge of the next-big-big innovation.
About 30 years ago, the Internet began to go mainstream and positively changed the arc of corporate growth forever. However, the utility of the Internet was not fully understood by businesses for many years, which is why we saw the dot-com bubble take shape.
Since the advent of the Internet, we have seen many next-big technologies, innovations, and trends, including genome decoding, 3D printing, blockchain technology, cannabis, and the metaverse. The problem is that they have all endured an early-stage bubble-bursting event.
Without fail, professional and everyday investors alike have constantly predicted how quickly a new technology or innovation will be adopted and used. This ultimately leads to frustration that causes the market leaders of these next-big-things trends to lose 80% to 99% of their value.
To be clear, I am in no way suggesting that AI cannot be a game-changing technology. What I am saying is that all new technologies and innovations need time to mature. The simple fact that most businesses cannot formulate a clear plan for how they will deploy AI to generate a positive return on their investment is a pretty good sign that we are in a bubble.
Another reason the AI bubble could burst in 2025 is due to the possible resolution of the GPU shortage that sent Nvidia’s stock into the stratosphere.
Demand for Nvidia’s hardware is backlogged, with orders for its H100 GPU, commonly known as the “hopper,” and its successor Blackwell GPU. When demand for a good or service easily exceeds its supply, it is normal for its price to rise. Earlier this year, Nvidia was commanding around $40,000 for its Hopper chip, up to a 300% premium. Advanced Micro Devices Was building mesh for their Insight MI300X GPUs.
In other words, Nvidia has been able to use the lack of AI-GPU to its advantage to raise the price point of its hardware and push its gross margins into the mid-70% range.
However, I fully expect this shortcoming to diminish in the new year. AMD is rapidly ramping up production of its chips and recently introduced its next-generation MI325X GPU.
Additionally, many of Nvidia’s top customers through net sales are developing AI-GPUs internally for use in their data centers. While Nvidia’s chips should remain superior from a computing perspective, these in-house developed GPUs are going to be quite cheap and easy to access. This is a recipe for Nvidia losing valuable data center real estate and reducing its pricing power and margins.
Image source: Getty Images
In addition to history not being on the side of the AI revolution, the AI rally could also be reversed due to actions taken by US regulators.
In 2022 and 2023, regulators under the Biden administration announced a ban on exports of high-powered AI chips and chip-related manufacturing equipment to China. This affects major hardware manufacturers like Nvidia, as well as companies providing equipment to develop AI solutions. For example, semiconductor wafer fabrication equipment company Lam Research generated 37% of its revenue from China during the quarter ended September and 39% in the quarter before that.
Under President-elect Donald Trump, it is unlikely that we will see these restrictions eased or lifted. Trump took a tough stance toward the world’s No. 2 economy during his first term as president, and that is likely to continue when he takes office on Jan. 20.
To add, Trump has opined that he will impose a 35% tariff on imports from China into the US on day one. Most likely, this is going to fuel a trade war that will strain trade relations between the world’s two largest economies and adversely affect sales of AI products to China.
The ultimate reason for the bursting of the AI bubble in 2025 has to do with the historically unsustainable valuation premiums currently being assigned to market-leading artificial intelligence stocks.
Over the past 30 years, businesses on the leading edge of the next-big-new innovations have often topped out at 30 to 40 times 12-month sales. This is where Amazon And Cisco Systems The dot-com bubble peaked before it burst.
In 2024, we see Nvidia peaking at a price-to-sales ratio (P/S ratio) of over 40, while Palantir Technologies is currently pushing a P/S ratio of around 69. However, it is impossible to predict when the investor will be happy. will fade, history is clear that inflated valuations of this magnitude are not sustainable in the long term.
While businesses with consistent moats, such as Nvidia and Palantir, deserve premium valuations, relative to their peers, a price-to-sales ratio of 29 for Nvidia and nearly 69 for Palantir doesn’t make sense.
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John Mackey, former CEO of Whole Foods Market, is a member of the board of directors of The Motley Fool, an Amazon subsidiary. Sean Williams There are positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Cisco Systems, Lam Research, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom. Motley Fool has a Disclosure Policy.
