Nvidia (NASDAQ:NVDA) stock has taken the NASDAQ down a peg recently. Investors are asking why. This has not made the stock cheap. Even at its recent price of $118 per share, Nvidia had a market cap of $2.9 trillion. That’s based on analyst estimates of $120 billion in sales for this year, and $140 billion for 2025.
NVDA stock has been valued at over 20 times sales for years now. Today’s estimates are that sales will grow at the present rate, compounded for at least a decade. That’s not happening. Here’s why.
A Closer Look at NVDA Stock
Nvidia AI chips are energy hogs. The Hopper H-100 takes 1,000 watts of power. That’s about as much as a high end microwave. But unlike the microwave, the load is continuous. Next year’s Blackwell B-200 will take 1,875 watts of power. Nvidia plans to make millions of them.
This is because Huang’s Law, on which the chips are based, beats Moore’s Law by ignoring some of its limitations. Instead of dealing with the heat issues from running faster computations, Nvidia is using liquid cooling and continuing to make its chips bigger.
Beyond the difficulty in making big chips efficiently, there remains the cost of powering them. The Cloud Czars haven’t yet accounted for the ongoing energy cost of running Nvidia fueled data centers. This is not a secret.
The Internet boom happened because Internet services were cheap for all users. It was subsidized by advertising. The need for heating, and cooling, Nvidia racks means this can’t happen with the AI boom. There’s going to be a growing class distinction in the AI world, between AI haves and AI have-nots.
Getting the Money Out
How will AI pay for its energy use? Microsoft (NASDAQ:MSFT) is charging companies $30 per user per month to use their Co-Pilot AI. Windows 365 by itself is under $10/month.
Amazon (NASDAQ:AMZN) is reportedly planning to charge $10/month for its new Alexa service. Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) plans to charge $20/month for Gemini, after a two-month trial.
The Big AI market is starting to look a lot like streaming. Ask Warner Bros. Discovery (NASDAQ:WBD) or Paramount Global (NASDAQ:PARA) how that’s working out.
At least the TV streamers can claim unique content. But subscription pricing means customers are far more likely to choose a single AI platform and stick with it. This means there’s a limit to the AI market, namely what people will pay for.
The Internet boom worked out because it worked for everyone. Costs mean AI will only work for those who can pay the price for it. The energy costs of AI mean you won’t get much service from advertising.
There aren’t that many folks out there who can afford to pay for the energy required to get value from AI. This includes small business customers as well as consumers.
The Cloud Czars at least try to re-use the waste energy from Nvidia chips. But Nvidia racks let anyone become a Cloud Czar. Elon Musk is making xAI a Cloud Czar. Oracle (NASDAQ:ORCL) has the cash to buy as many racks as any Cloud Czar.
Application vendors like Salesforce.com (NASDAQ:CRM) are building their own data centers, becoming independent of the Cloud Czars.
We can’t expect all these buyers to act responsibly.They will have to pay not only for the energy needed to keep racks going, but for cooling to keep them from overheating.
The Bottom Line
Nvidia is reversing the progress we’ve made against fossil fuel energy, and thus global warming.
This limits its market.
Nvidia’s architecture problems will soon slow the roll of AI, and of other related applications. It could lead to more AI applications being based on clients whose energy needs are known, rather than on servers, where they’re exponentially greater. That’s why Apple (NASDAQ:AAPL), which is putting AI into its phones, is rising right now.
None of that helps Nvidia. It’s time to hit pause.
As of this writing, Dana Blankenhorn had a LONG position in NVDA, MSFT, AAPL, AMZN and CRM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
