Is Nvidia Still the Stock in Q3 That the Generative AI Boom Has Led Us to Believe?

Nvidia (NASDAQ:NVDA) has shown breathtaking growth over the past 18 months, but with the stock becoming increasingly volatile in the third quarter, is it still the star of the ongoing generative AI boom?

Q3 2024 has seen Nvidia ebb and flow on Wall Street, recording declines and rallies that have frequently exceeded 20% in a matter of days following the stock’s landmark $3 trillion market capitalization berth in June. Since its Q2 peak, NVDA has slipped more than 20%, falling back below its lofty $3 trillion cap.

This newfound volatility doesn’t detract from Nvidia’s astounding performance of late. Between Q1 2023 and Q2 2024, the stock rallied 731.36%, and NVDA’s status as a key member of Wall Street’s Magnificent Seven appears to be assured.

But the stock’s recent volatility has brought sharper and deeper losses than at any other stage of its bull run.

Despite posting expectation-beating second-quarter earnings in recent weeks, Nvidia’s stock has continued to slide alongside wider market slowdowns in the US. With this in mind, should investors be worried? And is the stock really the same proposition today as it was during the heady days of the generative AI rally last year?

Volatility is Common for NVDA

Despite its significant levels of outperformance in recent months, Nvidia has a history of strong volatility.

According to economist Hendrik Bessembinder, Nvidia’s stock price has fallen more than 50% repeatedly in the 21st Century.

Notably, weak chip demand for the semiconductor firm brought a 60% decline from 2011 to 2012, and the arrival of crypto winter in 2018 saw NVDA fall 57% in the months that followed.

Even in the months leading up to the launch of ChatGPT, the OpenAI innovation that heralded the start of the generative AI boom, Nvidia was on a 67% downturn due to widespread tech stock sell-offs on Wall Street.

Historically, the semiconductor industry has been cyclical, so what’s stopping Nvidia from suffering from another heavy decline in the future? The answer is the firm’s gamble on generative AI.

Nvidia’s Reliance on GenAI Growth

Nvidia has bet big on the future of generative AI, and with the semiconductor firm well-positioned to drive the technology of the future using its powerful range of computer chips, there’s plenty of reason for the reliance on growing GenAI capabilities at an enterprise level.

As a result, we’ve seen a steady innovation pipeline for generative AI initiatives from Nvidia. In recent weeks alone, the firm has announced an AI education program in association with the State of California, which will see college and adult education classes geared towards growing generative AI skills.

August saw Nvidia launch a deep learning framework for generative physical AI, while July brought the announcement of generative AI models and NIM microservices that have the potential to grow artificial intelligence language, geometry, physics, and materials capabilities.

Could this represent a gamble for Nvidia? According to Maxim Manturov, head of investment research at Freedom24, the strategy could help the firm diversify away from its old dependence on selling hardware.

“Critics might argue that Nvidia's current market capitalization reflects overly optimistic expectations for the future, especially given its historical reliance on cyclical hardware sales,” Manturov explained.

“However, its strategic pivot towards software and artificial intelligence-based technologies mitigates some of this volatility risk, potentially justifying a premium valuation.”

Could GenAI Send Nvidia to $4 Trillion?

Nvidia’s proactive approach to embracing generative AI technology means that the stock is likely to benefit from GenAI market growth.

This is good news for NVDA when Bloomberg Intelligence forecasted generative AI to become a $1.3 trillion market by 2032. However, not all market commentators share such a bullish viewpoint.

Gartner data predicts that 30% of current generative AI projects will ultimately be abandoned after proof-of-concept by 2025, with many falling flat due to factors like poor data quality, weak risk control, a lack of business value, or high implementation costs.

John Naughton, professor of the public understanding of technology at the Open University, claimed that we’re currently in the ‘euphoria’ phase of what could be an AI bubble, which will soon give way to ‘profit-taking’ and, finally, ‘panic’.

The coming months will be pivotal for the sustainability of the generative AI boom as enterprises seek out cost-effective ways to implement the technology, a feat that can be difficult when the money-spinning emerging tech appears to be confined to the multinational corporations developing or funding it.

Despite this, Peter Oppenheimer, chief global equity strategist at Goldman Sachs Research, believes that generative AI stocks aren’t showing signs of being in a bubble. Instead, the strategist views the strong balance sheets and healthy returns on investment among the industry’s firms as a sign that the technology cycle is still in its early stages with more room for outperformance.

Is There Room for More Growth for NVDA?

While the stock’s strong Q2 2024 earnings report will help to shape Nvidia’s path throughout the third and fourth quarters, the wider generative AI boom will play the deciding role in whether or not NVDA can recapture its $3 trillion market capitalization as well as pave the way for a $4 trillion berth.

Optimism for generative AI remains high on Wall Street, and investors wishing to know the future performance of Nvidia will do well to monitor the sentiment surrounding the emerging technology’s long-awaited implementation phase at an enterprise level.