Colin’s Note: Artificial intelligence stocks are headed higher once again…

After industry bellwether Nvidia’s earnings report last week completely blew past Wall Street’s expectations, AI stocks are still on the rise after more than a year of near-nonstop gains.

But the news has brought the skeptics out in force… once again voicing the question on everyone’s mind…

How long can it last?

We know AI stocks can’t keep up this furious pace indefinitely. It’s not a question of if the bubble will burst, but when.

So, today, I’m sharing with you three indicators to watch for that will signal a slowdown in the AI trade. With demand still running hot, it won’t come tomorrow… But with these three signs on your radar, you won’t be caught off guard when it bursts.

It’s all in today’s video. Just click below to access it. And, as always, you can let us know your thoughts, concerns, and questions at [email protected].

Hello subscribers and welcome back to The Bleeding Edge. My name is Colin Tedards, and I hope you all are having a great day today.

Last week, Nvidia reported its earnings. It was another blowout. The company beat expectations really across the board and raised the bar again for its upcoming quarter in terms of revenue.

Shares of Nvidia soared to record highs again. The market value of Nvidia is now larger than Google and Amazon. Maybe even more impressive is that the market value of Nvidia is larger than Walmart, Tesla, Nike, Starbucks, and Netflix combined.

The astronomical rise of Nvidia shares has increased the wealth of many shareholders, mostly on paper right now… And it has also raised the eyebrows of skeptics.

Nvidia shares… the artificial intelligence (“AI”) trade… look, we know this can’t last forever. Some might even say that the bubble has to burst at some point.

But I think the question that we have to ask right now is how do we know when?

Will the AI trade and Nvidia shares peak in 2024? Will they start going down in 2025? Or will it be something that happens beyond that?

Correctly identifying when the demand starts to level off will allow us to secure profits and not feel the pain that many investors feel when they watch their stocks go up… only to see them come right back down.

Today, we’re going to be talking about some of the signals my team and I here at Brownstone Research are looking at. I want to share with you what we’ve been talking about to judge if – and when – the AI bubble is about to burst.

The first point, though, I want to make is that we do see demand for semiconductors staying strong through the end of 2024. We follow all the publicly traded semiconductor stocks and many of the private ones as well.

From all the AI-focused chip designers like Nvidia, Broadcom, and AMD… to the fabricators like TSM… to the equipment makers like ASML and Applied Materials… No one, not a single one, is signaling a slowdown in demand. So that’s the good news.

But Wall Street is so often forward-looking. By the late summer or fall of this year, analysts are already going to be looking forward to 2025 and wondering what demand and sales will be like.

If demand for AI chips starts to fall – or even level off – in 2025, shares of most of these companies are probably going to peak in 2024. So my team is closely following what’s happening in the semiconductor space.

And I want to share with you the three key indicators that will signal the AI trade is about to slow down… or as some people might say – that the bubble is about to burst.

The first signal is that hyperscalers are going to cut back their spending.

“Hyperscalers” is just a fancy Wall Street term for a big cloud company. The biggest are Amazon, Microsoft, and Google… But you also have Meta, Oracle, IBM, and many, many others out there.

The first thing to remember is that these hyperscalers are where Nvidia is selling its chips. Nvidia isn’t selling to you and me – to individual consumers or the general public. It’s selling to the companies with tens of billions – in some cases hundreds of billions – of dollars in cash sitting in their bank accounts.

This year, Microsoft committed to spend about $50 billion on capital expenditures, largely data centers and AI chips. So far in the early part of 2024, Microsoft has shown no indication of slowing that down.

So we have to assume that demand remains strong. But if towards the end of the year – again, late summer, early fall – if Microsoft comes on conference calls and says they’re going to start tapering back that spending or slowing it down… Well, that’s giving us our first indication that the hyperscalers might have enough AI chips to meet the demand that they have. We’ll also closely be looking at Amazon, Google, and many others for those signals.

Indicator number two is that Nvidia will start to cut pricing. Right now, Nvidia has absolutely no reason to cut prices. By most estimates, Nvidia has control of 70%, 80%, in some cases maybe close to 90% of this market. They have a dominant position. And it takes a while for the other chipmakers like AMD, Broadcom, and others to catch up to where Nvidia has been investing in this space for over a decade.

So Nvidia has all the market share and they have no reason to cut prices. But we’ve seen a situation like this play out in the stock market before.

Tesla still largely has a dominant position in the electric vehicle (EV) market. While it doesn’t control 100% of the market, they’re still the largest EV maker here in the United States. Globally, I think they are number two.

After years of seeing rapidly increasing demand – and in some cases, increasing pricing – over at Tesla, the EV maker started to cut prices of its popular electric vehicles last year. And that has signaled the top in the EV market and shares of Tesla. Other EV makers like Rivian and Lucid simply have not recovered.

If we see Nvidia start to cut prices, it will be one of the first signs the demand is starting to slow down. The company will have to cut prices to keep volumes and demand at levels that will keep the share price of Nvidia at levels that it is today.

The third and likely best signal that AI demand is starting to wane – at least in the semiconductor space – is suppliers will see their demand peak.

Now, this is going to be the first telltale sign that demand has peaked. AI chips are made from thousands of individual parts from hundreds of suppliers. These suppliers have to ramp up investment and spending to meet demand.

We also saw something similar in the EV space. Last year, a company called Air Test Systems saw its backlog of business dry up right as Tesla was beginning to cut prices. Shares of many of the EV companies started to peak. Air Test Systems was the leading indicator of slowing EV demand and sales.

We are likely going to see the same thing in the semiconductor space. Because if, and when, demand starts to peak at Nvidia, the first people and first companies they let know are going to be its suppliers… And the suppliers will be the first to report that weakening demand.

Now, I want to be clear, right now we see no demand slowdown in the semiconductor space. But historically, the semiconductor business has been very cyclical with many demand spikes and slowdowns.

These stocks tend to be very volatile, and it’s been a great trade over the past year. I think it will last into next year. But just like we’ve seen with other sectors from housing to technology to electric vehicles, demand can slow down. And the stocks can drastically go down after that demand falls.

We’ll be keeping a close eye on all of this. Don’t feel like you’re alone. We’ll continue to keep you updated here on The Bleeding Edge and all of our paid subscribers as well. Hopefully, guys, have a wonderful day out there. My name’s Colin Tedards, and we’ll see you again soon.

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