Nvidia, the engine of AI
The rise and potential fall.
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Friends,
I’m back. Kinda. Recovery is slow.
I was overwhelmed by all the good wishes that a few hundred of you sent my way. It gave me some sort of purpose - and I thank you. It’s an amazing feeling when a group of people, many of whom you don’t know, are willing you on. Thanks for the good vibes - they were well received.
OpenAI and ChatGPT may be the posterchild for this AI era, but it’s Nvidia that is the powerhouse for what’s actually possible. Without Nvidia, we woudnt’t have seen the scale of change over the last 20 months. To put things in context, OpenAI is looking to raise more capital (including from Nvidia) at a valuation of $100B. NVIDIA is valued at $3T - 250 times the size.
Nvidia is in a remarkable position right now. In just a few years, it has managed to dominate the AI chip market, holding an estimated 90% share depending on who you speak to. This level of dominance is unusual, especially in an industry as mature and competitive as semiconductors. But Nvidia’s rise wasn’t a fluke, and it certainly wasn’t quick.
The semiconductor industry had its heyday in the 1980s and 1990s, driven by the explosive demand for personal computers. Back then, chips were gold, and the companies that made them were raking in profits. But like all industries, semiconductors matured. By the 2000s, growth had slowed. Demand was still there, but the dramatic booms were over, and the industry became cyclical—profitable, but prone to ups and downs.
Investors have always had a complicated relationship with semiconductor stocks. In the 1990s, they were the darlings of the market. Then came the dot-com bust, and semiconductors were left out in the cold for a decade. But since 2011, they’ve been back in favor. Even so, the industry isn’t the growth story it once was. It’s a mature business, which means there are still winners and losers. Nvidia, it turns out, is a big winner.
Nvidia wasn’t always in the spotlight. Founded in 1993, the company stayed under the radar for years. Its strategy wasn’t to take on the entire semiconductor market but to carve out high-margin niches like gaming and cryptocurrency, which were the heavy usage use cases of that era. These bets paid off, paving the way for Nvidia’s biggest win yet: AI - and put Nvidia in the driving seat.
AI is the reason Nvidia’s stock has soared. The company’s GPUs, originally designed for rendering graphics in video games, turned out to be perfect for the parallel processing tasks required in AI. Nvidia recognized this early and quickly became the go-to supplier for AI chips. But this success also brings risks.
Nvidia doesn’t manufacture its own chips. It designs them but relies on companies like TSMC to produce them. This works well when everything runs smoothly, but it leaves Nvidia vulnerable to supply chain disruptions. If something happens to TSMC, whether due to geopolitical tensions or other factors, Nvidia’s whole operation could be at risk.
We are in the AI hype cycle. It’s why Nvidia’s stock has gone through the roof. But there’s always a difference between potential and reality. AI could be as revolutionary as electricity or the internet, but that doesn’t guarantee that investing in AI companies will pay off. Right now, the market is in the hype phase, where companies are getting huge valuations based on what AI might do, not on what it’s currently doing. And hype is dangerous.
If you’re holding Nvidia stock, you’re smarter than me and you’ve probably enjoyed a fantastic ride. But the current price assumes that everything will go perfectly for Nvidia and for AI in general. That’s a big assumption.
The problem with markets is expectation. AI is so hyped that even when their earnings are in line with expectation, markets drive down the share price - which is what happened this week. Nvidia is hot right now, and it might stay that way for a while. But when the momentum shifts—and it always does—those gains can evaporate quickly. If you’re trading Nvidia, enjoy the ride but be ready to jump off when the tide turns.
Nvidia’s rise is impressive, but it’s also precarious. AI is still in its early days, and while the demand for Nvidia’s chips is enormous, there’s no guarantee that AI will live up to the hype. If AI adoption lags or another technology leapfrogs it, Nvidia could find itself in a tough spot. Its future is tied to AI’s success, but that future is still uncertain.
Nvidia’s latest AI models, like Eagle, show how the company is trying to stay ahead of the curve. These models can process ultra-high-resolution images and are open-source, inviting collaboration and helping Nvidia remain central to AI development. But even with innovations like Eagle, and their new chip, Blackwell, Nvidia’s long-term success isn’t guaranteed. If AI doesn’t pan out as expected, all of this innovation might not translate into the explosive growth everyone is betting on.
Nvidia’s current situation is like being on a treadmill that keeps speeding up. They have to keep running faster just to stay in place. They’ve bet big on AI, and so far, it’s paying off. But the stakes keep getting higher, and at some point, the growth has to slow. When it does, Nvidia will need to manage expectations carefully.
The biggest risk might not be competition from other chipmakers like Intel or AMD. It might be that AI doesn’t deliver the returns everyone is banking on - simply because the level of investment that companies are investing in changing how they work. Nvidia has positioned itself as the indispensable supplier of AI hardware, but if AI doesn’t take off as expected, it’s going to end badly
Nvidia’s strategy seems to be a mix of doubling down on AI while diversifying enough to hedge against potential pitfalls. Their investment in OpenAI is a perfect example. By investing in one of AI’s most prominent players, Nvidia is ensuring that no matter what happens in AI, they’re part of the conversation.
But this strategy isn’t without risks. The more Nvidia ties itself to AI’s success, the more vulnerable it becomes to any downturns in the AI hype cycle. If AI stumbles, Nvidia could find itself in a tough spot, with a sky-high valuation that suddenly looks untenable.
The market loves Nvidia right now, but markets are fickle. They’ll turn on a company in a heartbeat if they sense trouble. Nvidia’s challenge will be to keep the AI train rolling while also preparing for the possibility that it could slow down or even derail. That means continuing to innovate but also being ready to pivot if AI doesn’t pan out as planned.
In the end, Nvidia’s future depends on its ability to balance these competing demands—continuing to push the envelope in AI while also managing the sky-high expectations that come with being at the center of the AI revolution. It’s a delicate dance, and one that will determine whether Nvidia continues to soar or comes back down to earth.
Stay Curious - and don’t forget to be amazing,
Here are my recommendations for this week:
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