Is Nvidia Still a Safe Bet if the "AI Bubble" Deflates?

Investment bubbles have distinct phases, with the last one being the most painful. Indeed, the excitement can get so fevered that a bubble's collapse can be deep and even take the entire market down along with it. It looks like artificial intelligence (AI) may be a building bubble, with Nvidia (NASDAQ: NVDA) the poster child for the technology.

Will Nvidia be a safe bet even if the AI bubble deflates?

What does a bubble look like?

Broadly speaking, there are five different phases to an investment bubble. Using artificial intelligence as the example here, displacement was when the new technology came on the scene. The boom has been taking place, as investors rush in to buy AI-related stocks, bidding up their prices. Euphoria is the next stage, which is when investors start to make irrational decisions in the belief that AI-related stocks can only go up.

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It's worthwhile to take a quick pause here, because there are very clear signs that AI is in this stage. An example is Opendoor Technologies (NASDAQ: OPEN), which had fallen into penny stock land not too long ago. It was even forced to plan a reverse stock split to regain compliance with exchange listing rules. At least, until the company brought in a new CEO who just so happened to talk about using AI to turn the house-flipping company's fortunes around.

Despite nothing at all having actually been changed at the company when he talked about using AI, the stock skyrocketed just on the incoming CEO's comments. That's the type of thing that happens when a bubble is in the euphoria stage.

The fourth stage of a bubble is the peak. It is hard to know when this comes along, but it sounds like what it is. Stock prices reach a point where investors start to question whether the good times can continue, and a few start to take profits. That is often, sometimes quickly, followed by the final stage of collapse. This is when the rest of the market follows the early money out the door, and stock prices plunge.

At this point, AI hasn't reached stages four and five, with stage four being more of a point in time than an actual lengthened period of time.

Will Nvidia avoid the pain?

Nvidia is at the core of the AI revolution with its high-tech computer chips in high demand. They are the "brains" that power AI. AI will always need high-powered chips, so it may seem reasonable to think that Nvidia can weather the AI bubble popping. That's not likely.

The problem with bubbles is that investors get so excited that they are willing to buy just about anything and pay just about any price. Still, you could easily argue that Nvidia's valuation isn't outlandish right now, perhaps highlighting that the stock's price-to-earnings ratio is actually below its five-year average. That fact probably won't matter when the peak is reached and the bubble collapses. That's because in the collapse, investors will sell anything related to AI just to get out of the investment theme.

Greed pumps the bubble up and fear deflates it. But as is so often true on Wall Street, these emotions swing the pendulum to the extreme. And even good businesses lose massive amounts of value that can take decades to rebuild.

Data by YCharts.

Take Cisco Systems (NASDAQ: CSCO) as an example. The dot.com bubble burst at the turn of the century. Some 25 years later, the stock still hasn't regained its peak valuation. Even if Nvidia avoids that outcome, it is highly unlikely it will be able to sidestep the AI collapse that will happen when the bubble finally deflates. In fact, given the increasing importance of AI-related stocks to the performance of the broader market, Wall Street will be lucky if it avoids a deep and painful bear market.

To put a number on that, Nvidia, Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT) make up 21% of the S&P 500 (SNPINDEX: ^GSPC). That's just three of the 500 or so stocks in the index, and they all have an AI component to them. Technology, meanwhile, accounts for nearly 35% of assets. If AI goes south, it is unlikely that Nvidia will avoid the pain, and it is highly likely that there will be a bear market, too.

There's no way to know when the bubble bursts

The big problem here is that there's no way to know when the AI bubble will burst. Bubbles have a habit of lasting longer than you believe possible. If you own Nvidia and have large profits in the stock, the best course of action may be to simply take some money off the table by selling a portion of your position. That way, you lock in some gains but still allow yourself the opportunity to participate if the stock keeps rising.

Just prepare yourself for the bubble bursting, which could come at any time and happen very, very quickly.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Cisco Systems, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.