NVIDIA versus market bubbles and CISCO

NVIDIA: Semis and AI giant NVIDIA (NVDA) reports aftermarket Wednesday. Consensus is for over $20 billion of revenues, more than three times what it reported this time last year. It’ll likely need to do better. With the stock rallied near 50% since Jan. 1st and investor expectations high. The broader market is also holding-its-breath with ‘Magnificent 7’ big tech performance and earnings concentration very high. But NVIDIA’s short-term GPU chip position is dominant. Their customers are well-funded. Their valuation is undemanding. And comparisons with dot-com era ‘picks-and-shovel’ CISCO (CSCO) or broader tech ‘bubble’ concerns seem overdone for now.

BUBBLES: These are obvious in hindsight but difficult to see at the time. We use insights from the Boom and Bust book on common characteristics of centuries of bubbles. 1) ‘oxygen’ or the marketability of the assets. This is clearly in place, with NVDA the S&P 500’s 3rd largest stock, and ‘Magnificent 7’ 30% of the index. 2) ‘Fuel’ or an easy availability of money and credit. This is not in place. US interest rates are at generational highs and 10yr yields highest since 2008. 3) ‘Heat’ or investor speculation. Also not in place. NVDA fwd. P/E is under 35x and broader investor sentiment only average. The market is unbalanced and concentrated. But not a bubble.

CISCO: The internet networking equipment giant was the ‘picks and shovels’ peer of NVDA from the 1990’s dot-com boom. But it’s also become the cautionary tale. With its current share price still well below its 2000 peak from twenty-four years ago. Despite the internet booming and its profits having risen seven-fold since then. Because investors very significantly overpaid. With CSCO’s fwd. P/E valuation of 107x at its 2000 peak. This is more than three times NVDA now (see chart). Reflecting its already strong profits. And risks customers may turn into competitors. China may become off-limits. Or growth may slow as move from training models to inference.

All data, figures & charts are valid as of 19/02/2024.