What Happens If Nvidia Crashes?: A Secret Threat To AI's Biggest Powerhouse

Welcome to this week’s Deep-fried Dive with Fry Guy! In these long-form articles, Fry Guy conducts in-depth analyses of cutting-edge artificial intelligence (AI) developments and developers. Today, Fry Guy dives into Nvidia’s potential collapse. We hope you enjoy!

*Notice: We do not receive any monetary compensation from the people and projects we feature in the Sunday Deep-fried Dives with Fry Guy. We explore these projects and developers solely to reveal interesting and cutting-edge AI developments and uses.*

Giant AI companies are getting bigger by the day … I mean really big. In fact, they’re becoming so big that if one of them fails, it could push the United States economy into a deadly downward spiral.

The Magnificent 7 (AAPL, AMZN, GOOG, META, MSFT, NVDA, and TSLA), all big AI players, account for over 35% of the entire S&P market cap even though they only make up 1.6% of the stock index. The leader of them all, Nvidia, accounts for 34% of all the S&P 500 gains for this year alone. Nvidia is carrying the S&P 500 like no company since possibly IBM four decades ago, as its stock value is up over 250% in the past year. As one expert says, “It’s unheard of.”

This concentration of wealth is unprecedented. In fact, it’s the highest concentration of corporate market cap in S&P’s 67-year-old history. But what does this consolidation of AI power and economic influence really mean? And what will happen to the global economy if one of these massive AI corporations fails? In this article, we are going to explore these questions, with a special focus on Nvidia. Plus, you’ll find out why violent AI chip wars are a real possibility.

DRUNK WITH POWER

Nvidia controls over 80% of the computer chip market and has achieved an astronomical $3 trillion market cap as a result. Its market cap is so huge that it could build the Burj Khalifa—the world’s tallest building—300 times over. This is mostly due to the rise of generative AI. AI takes a massive amount of computing power, and Nvidia is powering the projects of the largest tech companies in the world. So when AI advances, Nvidia rakes in the cash. But the cliche, “The bigger they are, the harder they fall,” must not be forgotten. If you look back in time, companies that grow as fast as Nvidia usually fall just as fast as they rose.

Giant corporations like Tesla and Cisco have met this exact fate. They skyrocketed in value only to fall 75% and 85% in a couple of years after peaking. Competition, lower margins, and revenue declines contributed to their falls. And with Nvidia’s crazy level of margins hovering in the mid-70% range, they too will be susceptible to increased competition and consequently lower margins, ultimately driving down their stock price in the years to come.

Even if Nvidia manages to maintain its insane margins and continues to dominate the market, the company does have one secret Achilles’ heel that could kill their historic rise and bring them back to Earth. In fact, it might even threaten the company as a whole. Nvidia’s Achilles' heel is its supplier.

SUPPLY CHAIN TENSION

Nvidia’s primary manufacturer is Taiwan Semiconductor Manufacturing Company (TSMC). The majority of Nvidia’s chips are made in factories in Taiwan, including the famous H100 GPUs which are used by big players like xAI, Tesla, Microsoft, and OpenAI. In fact, TSMC is driving so much of Nvidia’s success that they have recently become the first Asian company to reach a $1 trillion market cap.

So why is this a big issue? Such a heavy reliance on TSMC is threat to Nvidia because if anything happens to these facilities, Nvidia’s very existence could come under threat. But why would something happen to these facilities? … China.

There is a lot of tension between China and Taiwan, and it has existed for a long time. The Director of the CIA, Bill Burns, has even said, ”President Xi [of China] has instructed the PLA (People’s Liberation Army), the Chinese military leadership, to be ready by 2027 to invade Taiwan.”

The tension between Taiwan and China significantly heated up in 1949. At that time, there was a civil war in China, and out of that conflict a policy called “One China” emerged. “One China” asserts that China is the sole legal government over Taiwan, even though Taiwan operates as a separate entity with its own military, government, and constitution. The “One China’” policy is still in affect to this day, and while most countries (including the U.S.) acknowledge it, Taiwan nonetheless acts like an independent state, akin to any other country in the world.

One might wonder why the U.S., for example, even acknowledges the “One China” policy at all, when they pretty much ignore it in practice. The answer is because the U.S. and other countries benefit from placating the Chinese government. These countries want good economic relations with China because it’s vital for their economies. Without China’s constant supply of goods and consumer market, many of their economies could fail. So snubbing Taiwan in the process doesn’t seem like that big of a deal.

China’s implicit claim that Taiwan is part of China has caused a lot of tension in the region and probably some sleepless nights for Nvidia’s CEO Jensen Huang. But there is more to the story.

TIME TO TAKE CONTROL?

Over the last couple of years, the U.S. has limited China’s access to U.S.-produced AI chips. There are certain chips that Nvidia is not allowed to sell China even if they want to, for national security reasons. The biggest reason is because U.S. government officials don’t want China getting their hands on powerful AI chips that could be used for military weaponry. This doesn’t make the Chinese Communist Party isn’t too happy.

Chinese officials know that whoever controls AI chips control the future world, and right now that’s not China—it’s the U.S. The U.S., for the time being, has control of the most powerful AI chips throughout the world, and it looks like that will continue for years to come.

Amidst tightened U.S. export controls, Nvidia has made efforts to adapt its products for China, as the country contributed to only 17% of Nvidia’s revenue last year, down from 26% two years prior. Nvidia has attempted to overcome these chip bans as much as they can. The company plans to collaborate with Inspur, a major Chinese distributor, to launch and distribute the tentatively named “B20” chip by early 2025. This move aims to counter competition from Chinese firms like Huawei and Tencent-backed Enflame. But these chips still pale in comparison to chips sold in the U.S. market, like the Blackwell series. As a result, even if Nvidia succeeds in developing a special chip for China, the U.S. will still control the most powerful chips, leading to faster and more powerful AI innovation.

The U.S. will maintain this AI chip control unless Xi and China take some drastic measures—measures involving force. It’s possible that top Chinese officials look at Taiwan and see a goldmine for AI chip production … a goldmine that’s rightfully theirs. They see Taiwan as an AI chip hotbed ripe for the taking—a region, if militarily conquered, would make China the leader in the AI race overnight. For these reasons, it’s possible that China could decide to threaten or overtake Taiwan’s chip manufacturing factories, essentially capturing Nvidia’s power for themselves.

A CRASH BEYOND NVIDIA

If China does seize control of Taiwan’s chip factories, Nvidia’s stock price will likely take a historic hit. And it won’t just be Nvidia’s stock price that will be affected. Most of the Magnificent 7 stocks—ones that are heavily invested in AI and rely on Nvidia’s GPUs—will crash as well, sending the global economy into haywire. Remember, Nvidia alone accounted for 34% of the S&P’s growth in this year. So imagine if Nvidia, along with tech giants like Microsoft and Meta, rapidly crashes in value. That panic would reverberate throughout the entire market in a domino effect. It would be akin to the 2007-2008 financial crisis or even The Great Depression.

The concerning part about this hypothetical invasion is that it’s not just something China might attempt. Any U.S. enemy such as North Korea or even rogue terrorists could try to destroy Nvidia’s chip factories in Taiwan in a technological terrorist attack. Doing so would destroy the U.S. economy.

So, while the U.S. Government spends close to a trillion dollars on its military every single year, it might want to consider spending a few billion of those dollars fortifying Nvidia’s chip manufacturing plants in Taiwan. If it doesn’t, and those plants are targeted, every single person in the U.S. and beyond will be affected. If this plays out (let’s hope it doesn’t), we could see one of the greatest economic falls in history.

To be fair, this is all just hypothetical thinking, so it’s not something we should expect to happen. Rather, it’s just one scenario to think about and perhaps hedge against financially. At the end of the day, nobody wants to see this become a reality. We would much rather see Nvidia stock soar past $200 and beyond!