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, a stock by which all others are measured. Nvidia develops the chips that make artificial intelligence work, and because AI is being hailed as the most important technological development since the Internet, Nvidia shares have been surging since last year.
I'm not in a position to estimate how important – or how dangerous – AI will one day become, but I pay close attention to the stock market, which values Nvidia at more than $2.2 trillion, making it the third-largest publicly traded company the world is world behind Microsoft and Apple.
The enthusiasm for AI is driving up stock prices not only of Nvidia, but also of many other technology 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 rapid gains – up about 290 percent in the last 12 months – have me and many Wall Street analysts wondering how sustainable this increase is. The answer has implications for the entire market.
There are many ways to examine this, including traditional stock analysis, which takes into account sales, profits, 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 what Nvidia's market value would be in a decade if the company's stock price maintained its current pace.
What they told me boiled down to this: The sharp rise in Nvidia stock can't last long. And with much of the stock market engaged in the same feverish, AI-driven stock rush, the message is broadly true. If the market doesn't slow down soon, it could inflate into a bubble – and all bubbles eventually burst.
Personally, 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 can tell, AI produces spectacular images 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 quadrillion?
To their credit, all three AI chatbots I asked – Microsoft Copilot, powered 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 any degree of accuracy how a stock or the overall market would perform in the future. I wish human stock analysts would say that.
Just because Nvidia's stock price is growing fast now doesn't mean it will continue to grow fast, and certainly not over periods of up to a decade, they all warned me.
But I still pushed her to do some basic calculations, which I backed up with 20th-century technology—a spreadsheet and a calculator.
The chatbots didn't come up with the same numbers every time and never agreed on the details. In my humble opinion, this is another sign that they are not ready for prime time. I wouldn't use them for math homework.
But in this case the details didn't really matter. Ultimately, with considerable motivation, they all came to the same basic conclusion: the simple laws of compound arithmetic say that if the company's stock price continues to rise at its current pace, Nvidia will eventually reach a market cap of quadrillions of dollars.
Quadrillions are an order of magnitude I'm not familiar with, so I resorted to a dictionary: A quadrillion dollars is a 1 with 15 zeros after it, or a thousand trillion dollars in American parlance. (In British English, a quadrillion is even larger: 1 with 24 zeros. I use the American definition.)
What size is this? According to the World Bank, the global economy – the total size of all annual gross domestic products of all countries in the world – was $100.88 trillion in 2022. So if Nvidia continued to grow at its current annual rate, within 10 years it would dwarf the output of the entire known economic universe.
Claude 3, the Anthropic AI chatbot, calculated that at its current growth rate Nvidia would become a $2.76962 trillion company in 10 years, then warned me: “That's an exceptionally large number, which in reality seems implausible since it would result in them. “Nvidia is many times larger than the entire global economy.”
In plain language: Nvidia's astonishing growth rate last year is far too high to last for long. I would be cautious about buying Nvidia stock or any other stock because I expect the company's momentum to last forever. What goes up can also go down, and at some point it certainly will.
This warning underscores what traditional valuation metrics show. Nvidia's share price and the prices of many stocks are high. You can expect your sales and earnings to grow rapidly. However, if stock prices rise faster than earnings, the market party will eventually collapse.
Remember Apple?
Nvidia is an impressive company. Its products enjoy a good reputation, are in high demand and generate huge, fast-growing profits.
Its most recent earnings report in February, which sparked tremendous optimism in the stock market, contained eye-popping numbers. And in a conversation 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 beginning of a new industry where AI-dedicated data centers process huge raw data to refine it into digital intelligence,” he said. “Like AC power plants of the last industrial revolution, Nvidia’s AI supercomputers are essentially AI generation factories of this industrial revolution.”
The sky is the limit for the next few years, he said.
But Nvidia will inevitably grow more slowly. It is absurd to believe that it can grow larger than anything else in the universe.
But it could still grow quickly. Some companies have previously managed to maintain rapid growth over the long term.
Apple has, at various stages since its founding in 1976, confounded skeptics who regularly said the company had grown too big to continue expanding 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 Apple would be worth an impossible figure by 2022 if the company only grew at 20 percent per year over the following decade – much slower than the 2012 growth rate: more than $3 trillion. This number doesn't look unreasonable now.
Apple's market capitalization isn't quite that high yet, but it's close to around $2.7 trillion. Its old rival Microsoft, which was much smaller than Apple in 2012, now has a market cap of over $3 trillion. These two giants have been promoted and relegated many times and show every prospect of doing it again.
I don't know if Nvidia belongs in that lofty category, but it's clear that even if Nvidia won't be bigger than the entire universe, it could be significantly more valuable in the next 10 or 20 years. Then again, maybe it isn't.
It might be more like Cisco Systems, the most valuable company on the stock market in March 2000. That was the peak of another tech boom – the dot-com bubble. Cisco is still a solid company. Its products form the backbone of the Internet. But its market capitalization was $567 billion in 2000. It is now around $200 billion.
It will be fascinating to watch Nvidia's fate. But because I can't predict how the company or any other company will perform in the long term, I don't buy individual stocks – Nvidia, Apple, Microsoft, Cisco or anything else.
Instead, I settle for broad, low-cost index funds that reflect the entire market. It is a passive and less risky bet on the future that does not require stock selection.
If Nvidia grows quickly in the coming years, I won't miss out entirely because the stock market as a whole will likely grow too. If Nvidia falters, other stocks will likely pick up the slack at some point. At least that's what has happened in the last 100 years. The AI boom is an exciting ride. When it starts to slow down, those who have hedged will be pleased about it.