157 Reasons for Investors to Be Skeptical of Nvidia's Near-Parabolic Gains

Roughly 30 years ago, the internet began going mainstream and completely changed the growth trajectory for corporate America.

Since the proliferation of the internet in the mid-1990s, Wall Street has been waiting for the next game-changing innovation to provide a leap forward for American businesses. While numerous buzzy trends have come and gone, including 3D printing and the metaverse, artificial intelligence (AI) appears to have answered this long-awaited call.

While estimates are, understandably, fluid, the analysts at PwC are looking for the AI revolution to increase global gross domestic product (GDP) by 26% in 2030. This estimated $15.7 trillion GDP boost comes courtesy of increased productivity and various consumption-side effects.

A $15.7 trillion addressable market by the turn of the decade suggests plenty of businesses are going to benefit. However, no company has been a more direct beneficiary of the rise of AI than semiconductor titan Nvidia (NASDAQ: NVDA).

Image source: Getty Images.

Nvidia's operating expansion has been textbook

Since the start of 2023, Nvidia's market cap has skyrocketed from $360 billion to $3.4 trillion. While a couple of market leaders have reached the $3 trillion valuation plateau before, no one has ever witnessed a $3 trillion increase in market cap in less than two years.

Nvidia's success can be explained by its graphics processing units (GPUs) being the undisputed top choice in enterprise data centers. A study from TechInsights found that Nvidia shipped 2.64 million GPUs to data centers in 2022 and 3.76 million in 2023, which represents a 98% share of GPUs shipped to high-compute data centers over these two years.

Nvidia's H100 ("Hopper") chip and successor Blackwell GPU architecture are serving as the brains of AI-accelerated data centers. With orders for these chips backlogged, the company has had little trouble commanding a premium price for its products.

Earlier this year, the Hopper chip was briefly fetching north of $40,000, which is roughly quadruple what Advanced Micro Devices is netting for its Insight MI300X GPUs. A substantially higher price point fueled by AI-GPU scarcity has lifted Nvidia's gross margin to the mid-70% range.

Additionally, Nvidia's CUDA software platform has been masterful in keeping customers loyal to its ecosystem of products and services. CUDA is the platform used by developers to build large language models and maximize the computing potential of their AI-GPUs.

Image source: Getty Images.

Insiders offer 157 reasons for investors to be skeptical of Nvidia's ascent

On paper, seemingly everything has gone perfectly for Nvidia. But when things seem too good to be true on Wall Street, they usually are.

One of the many tools investors can use to gauge both sentiment and value toward a stock is insider activity. Company insiders, which includes board directors and high-ranking members of the executive team, are required to file Form 4 with the Securities and Exchange Commission shortly after they purchase or sell shares of their own company's stock.

On Dec. 3, 2020, Nvidia's Chief Financial Officer Colette Kress purchased 200 shares of her company's stock on the open market for approximately $107,400. This marks the last time an Nvidia board member or executive has purchased shares.

Comparatively, Nvidia insiders have filed 157 separate Form 4s since Dec. 3, 2020, selling shares of their company's stock.

Understandably, not all insider selling is necessarily bad news or portends trouble. Some insiders sell to cover their tax bill -- executives may generate the lion's share of their pay from stock-based compensation, including stock options -- while others are simply diversifying their portfolios or locking in some gains. These are generally benign reasons to sell.

But when it's been over four years since the last insider purchase, it raises questions. Whereas there are multiple reasons to sell stock, there's only one reason for insiders to buy: the expectation of shares increasing in value. With sells outnumbering buys 157 to zero over the last four years, it paints a pretty clear picture that insiders don't believe Nvidia stock is a good value.

History may be an insurmountable headwind for Nvidia

In addition to a steady dose of insider selling by Nvidia's board and executives over the last four years, history is another potential sore spot for current and prospective shareholders to monitor.

While there's no denying the long-term potential AI brings to the table for most sectors and industries, history is crystal clear that next-big-thing technologies need time to mature. For three decades, which includes the advent of the internet, every hot trend or innovation has navigated its way through an early stage bubble -- and there's nothing that suggests artificial intelligence will avoid this fate.

To add fuel to the fire, most businesses have yet to provide clear plans as to how they'll use AI to generate a positive return on their artificial intelligence hardware and software investments. This serves as further evidence that investors have, once again, overestimated the early stage utility and adoption rate of a new technology.

If history rhymes and the artificial intelligence bubble does burst, I can't imagine a stock being hit harder than Nvidia, which has relied almost exclusively on an influx of GPU demand to deliver otherworldly sales growth.

For investors with a five-plus-year timeline, these concerns are unlikely to ruffle too many feathers. As noted, AI has a promising outlook and a tantalizing addressable market. But in the quarters and few years that lie ahead, it wouldn't be a surprise if Nvidia's near-parabolic climb came to an abrupt halt.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.