On Wall Street, there's always a next-big-thing innovation, technology, or trend vying for the attention of professional and everyday investors. Since the advent of the internet in the mid-1990s, investors have been eagerly awaiting the next game-changing innovation that would alter the growth arc for corporate America. After numerous buzzy trends have come and gone, artificial intelligence (AI) aims to give the proliferation of the internet a run for its money.
With AI, tasks that would normally be overseen or undertaken by humans are instead handled by AI-driven software and systems. The catalyst that gives AI almost limitless potential is the ability for software and systems to learn and evolve over time without human intervention. By 2030, the analysts at PwC estimate that AI can add $15.7 trillion to the global economy.
Although AI stocks have been making most billionaire money managers and investment funds notably richer throughout 2023 and the first half of 2024, not everyone has come along for the ride.
Image source: Getty Images.
SoftBank's $160 billion "boo-boo" with Nvidia
In May 2017, SoftBankGroup(OTC: SFTB.Y)(OTC: SFTBF) unveiled a sizable investment -- a 4.9% stake -- in graphics processing unit (GPU) provider Nvidia(NASDAQ: NVDA) via its then-newly launched Vision Fund.
SoftBank's Vision Fund had roughly $90 billion in available capital following its launch and aimed to put money to work in the AI technology ecosystem. Keep in mind that this "ecosystem" extends well beyond the hardware that Nvidia now makes, and can include the infrastructure and software supporting next-gen AI advancements.
Between the time SoftBank's Vision Fund made its initial investment in Nvidia and the start of October 2018, Nvidia's stock effectively tripled in value. Rapidly evolving interest in cryptocurrencies made Nvidia's GPUs a hot commodity for crypto miners looking to earn a profit.
But when the crypto bear market arrived, interest in Nvidia's GPUs quickly evaporated from cryptocurrency miners. By early 2019, SoftBank's Vision Fund had sold its position in Nvidia and banked a healthy profit of more than $3 billion.
Although nobody's ever gone broke taking a profit, hindsight isn't always pretty on Wall Street.
As most readers are probably aware, Nvidia's H100 GPU in 2023 quickly became the de facto choice by businesses looking to run generative AI solutions and train large language models in their high-compute data centers. Last year, Nvidia was responsible for an estimated 98% of the 3.85 million AI GPUs that were shipped, according to TechInsights.
Aside from its first-mover advantage in AI-accelerated data centers, Nvidia also benefited from demand for its hardware handily outstripping supply. The beauty of this scenario is that it allowed the company to substantially increase the price of its GPUs, which ultimately pushed its adjusted gross margin to 78.4% during the fiscal first quarter (ended April 28).
In just a little over 18 months, Nvidia has gained close to $3 trillion in market value. If SoftBank's Vision Fund had the wherewithal (and stomach) to hold on to its original investment in Nvidia, it would be worth nearly $163 billion, as of the closing bell on July 10.
Though SoftBank "banked" around a $3 billion profit on its previous stake in Nvidia, it ultimately missed out on $160 billion in additional capital gains.
Image source: Getty Images.
SoftBank's Nvidia overhang is likely to be short-lived
While SoftBank's management team and investment gurus can dream of what could have been with Nvidia, there are two reasons the company will likely get over this missed opportunity sooner than later.
The first panacea for SoftBank is that history suggests Nvidia is in a sizable bubble. Since the internet became relevant in the mid-1990s, there hasn't been a single next-big-thing investment trend that's avoided an early-stage bubble.
Put another way, investors have, without fail, consistently overestimated how quickly businesses or consumers would adopt a new technology or trend. If artificial intelligence follows this same trajectory and needs time to mature as a technology, arguably no company would face more potential downside than Nvidia.
To add to this point, most businesses really don't have a clue how they're going to deploy AI solutions to improve their sales and profits. While many industry leaders are investing in the necessary hardware to run high-compute data centers, most lack a well-defined blueprint for how it's going to improve their operations.
Additionally, competition is coming at Nvidia from all angles. On top of contending with external competitors entering the scene, all four of Nvidia's top customers by net sales are developing AI GPUs for their data centers. Even if Nvidia's chips retain their compute advantage, a lessening of AI GPU scarcity, coupled with less space in data centers for Nvidia's hardware, would reduce its pricing power and, ultimately, its adjusted gross margin.
Three years from now, SoftBank's Nvidia boo-boo is liable to be a lot smaller.
The second reason SoftBank is unlikely to dwell on its (in hindsight) early sale of Nvidia stock is the outperformance of intellectual property (IP)-driven semiconductor companyArm Holdings(NASDAQ: ARM) since going public last year.
Arm isn't responsible for making the hardware used in enterprise data centers. Rather, semiconductor Goliaths pay Arm royalties and/or licensing fees to use its central processing unit, GPU, and various IP system designs. This is a high-margin operating model that puts Arm right at the heart of the AI revolution.
In August 2023, just a month prior to Arm's initial public offering (IPO) at $51 per share, SoftBank Group acquired the final 25% of Arm that it didn't already own. At the time, this valued Arm Holdings at $64 billion.
Following Arm's IPO, SoftBank retained 90% of the company's outstanding shares. With demand for AI GPUs rocketing into the stratosphere, Arm's growth forecasts have impressed Wall Street and investors. As of the closing bell on July 10, SoftBank's roughly 90% stake had ballooned in value to almost $176 billion. In just 10 months, SoftBank has seen its investment appreciate by $112 billion!
So although SoftBank undeniably missed with Nvidia, it's hit its investment in Arm Holdings out of the park.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
