If Nvidia continues to rise like this, it will be bigger than the global economy
It’s not a household name yet, but anyone who follows the stock market knows at least something about Nvidia.
The company is the wonder of the year, a stock by which all others are measured. Nvidia designs the chips that make artificial intelligence work, and with AI being hailed as the most important technological development since the internet, Nvidia’s shares have soared since last year.
I’m not qualified to judge how important – or how dangerous – AI will ever become, but I am paying close attention to the stock market, which values Nvidia at more than $2.2 trillion, making it the third-largest publicly traded company in the world world is. world behind Microsoft and Apple.
The enthusiasm for AI is boosting the stock prices not only of Nvidia, but also of many other tech companies believed to be aware of the technology’s potential, including Microsoft, Meta and Alphabet, as well as other chipmakers such as AMD, Taiwan Semiconductor and Intel .
But the blistering pace of Nvidia’s profits — up about 290 percent over the past twelve months — has me and many Wall Street analysts wondering how sustainable this run is. The answer has implications for the entire market.
There are many ways to investigate this, including traditional stock analysis, which takes into account revenue, earnings, cash flow, business growth and momentum. I took an unusual approach: I asked several AI chatbots about Nvidia’s prospects as a stock. Specifically, I asked how large Nvidia’s market value would be in ten years if the company’s stock price maintained its current pace.
What they told me boiled down to this: the sharp rise in Nvidia stock cannot continue for long. And with much of the stock market embroiled in the same feverish AI-driven stock frenzy, the message is broadly true. If the market doesn’t slow down soon, it could inflate itself into a bubble – and eventually all bubbles will burst.
On a personal level, I love new technology, but I try not to get too excited about it until I’m sure it works safely and reliably. As far as I know, AI produces spectacular visuals and is fun to play with, but it is neither reliable nor safe (yet).
(The New York Times sued OpenAI and Microsoft in December for copyright infringement of news content related to AI systems.)
What’s in a billiard?
To their credit, all three AI chatbots I asked – Microsoft Copilotpowered by OpenAI’s Chat GPT-4; Google Gemini; And Claude 3 from Anthropic – were hesitant to answer my questions directly.
All said they could not reliably assess stock valuations or predict with the slightest accuracy how a stock or the overall market would perform in the future. I wish stock analysts said that too.
Just because Nvidia’s stock price is growing rapidly now doesn’t mean it will continue to grow rapidly, especially over periods as long as ten years, they all warned me.
But I still forced them to do some basic calculations, which I supported with 20th century technology: a spreadsheet and a calculator.
The chatbots didn’t arrive at the same numbers every time and never agreed on the details. That’s another sign, in my humble opinion, 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. Ultimately, and with considerable prodding, 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 its current rate, Nvidia will end up with a market cap in the trillions of dollars. dollars.
Quadrillions are an order of magnitude that I’m not comfortable with, so I resorted to a dictionary: One trillion dollars that is 1 with 15 zeros after it, or a thousand trillion dollars in American parlance. (In British English, a quadrillion is even bigger: 1 with 24 zeros. I’m using the American definition.)
How big is that? The global economy – the combined size of all annual gross domestic products of every country in the world – reached $100.88 trillion in 2022, according to the World Bank. So if Nvidia continued to grow at its current annual rate, the output of the entire known economic universe would shrink within a decade.
Claude 3, the Anthropic AI chatbot, calculated that Nvidia, at its current growth rate, would become a $2.76962 trillion company within ten years, then warned me: “This is an extremely large number that actually seems unlikely, because Nvidia is many times larger than the entire global economy.”
In plain English, Nvidia’s astonishing growth over the past year is far too high to continue for long. I would be wary of buying shares of Nvidia, or any other stock, in the belief that its momentum is perpetual. What goes up can come down, and somewhere down the road 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 by assuming that their sales and revenues will grow at a breakneck pace. But if stock prices rise faster than profits, the market will eventually crash.
Do you remember Apple?
Nvidia is an impressive company. The company’s products are well-reputed, in high demand, and generating huge, fast-growing profits.
February’s latest earnings report, which unleashed enormous optimism in the stock market, contained eye-popping numbers. And in a call with Wall Street analysts, Nvidia CEO Jensen Huang gave Wall Street something exciting to think about. The company’s technology lays the foundation for a new industrial revolution, he said.
“We are now at the dawn of a new industry in which AI-specific data centers process massive raw data and refine it into digital intelligence,” he said. “Like AC power generation factories of the last industrial revolution, Nvidia AI supercomputers are essentially AI generation factories of this industrial revolution.”
The sky is the limit for the coming years, he suggested.
But Nvidia will inevitably grow more slowly. It is absurd to think that it can become bigger than anything else in the universe.
But it can still grow quickly. Some companies have previously succeeded in sustaining rapid long-term growth.
At various stages since its founding in 1976, Apple has baffled skeptics, who regularly said the company had become too big to continue growing rapidly. For example, in 2012, 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 quoted an analyst who used a spreadsheet, not a chatbot, to assess Apple’s prospects. The analyst concluded that if the company grew at just 20 percent per year over the next decade — much slower than its 2012 growth rate — Apple would be worth an impossible number by 2022: more than $3 trillion. That number doesn’t look strange now.
Apple’s market cap hasn’t quite reached it yet, but it’s close, at about $2.7 trillion. Its old rival, Microsoft, which was much smaller than Apple in 2012, now has a market capitalization of more than $3 trillion. These two giants have risen and fallen many times and show every prospect of being able to do so again.
I don’t know if Nvidia belongs in that lofty category, but it’s clear that while Nvidia won’t be bigger than the entire universe, it could be significantly more valuable in the next ten to twenty years. But maybe not.
It might look more like Cisco Systems, the most valuable company on the stock market in March 2000. That was the height of a new technology boom: the dot-com bubble. Cisco is still a solid company. The products form the backbone of the internet. But its market cap in 2000 was $567 billion. Now it is about $200 billion.
It will be fascinating to see how Nvidia’s fate unfolds. But because I can’t predict how the company, or any company, will fare in the long run, I don’t buy individual stocks – not Nvidia, Apple, Microsoft, Cisco or whatever.
Instead, I settle for broad, low-cost index funds that track the entire market. They are a passive and less risky bet on the future that does not require stock selection.
If Nvidia grows rapidly in the coming years, I won’t miss this entirely, as the stock market will likely grow as well. If Nvidia fails, other stocks will likely lose out at some point. At least that’s what happened over the past hundred years. The AI boom is a thrill ride. If things start to slow down, those who hedged their bets will be glad they did.