Nvidia 2023 vs Cisco 1999: Will History Repeat?

After
the
company
went
public
in
1990,
Cisco
stock
surged
more
than
1,000
times
over
the
decade,
striking
a
high
of
$80
(£63.66)
on
March
27,
2000.
But
then
it
was
hit
hard
by
the
collapse
of
the
dot-com
bubble,
plunging
to
a
low
of
$8.60
on
October
8,
2002.

More
than
20
years
later,
Cisco
is
yet
to
reach
its
March
2000
peak.
Over
the
past
decade,
its
stock
has
returned
11%
per
year,
in
line
with
the
Morningstar
US
Market
Index
(10.9%
dividend
included)
but
below
the
Nasdaq
Composite
Index
(14.6%
dividend
included).

Will
Nvidia
meet
the
same
fate?
Or
will
it
achieve
the
kind
of
long-term
performance
seen
by
other
innovators
like
Apple
[AAPL]?
Investors
must
consider
the
differences
between
the
companies’
business
models,
as
well
as
the
market
backdrop
now
versus
then.

Nvidia
may
be
riding
a
wave
of
interest
in
artificial
intelligence –
as
its
chips
play
a
dominant
role
in
the
technology
–
but,
more
broadly,
stocks
are
still
recovering
from
the
2022
bear
market.
Regardless,
some,
such
as
fund
managers
Chris
Mack
and
Rick
Schmidt
at
Harding
Loevner, see
parallels between
Nvidia
now
and
Cisco
in
the
1990s.

Nvidia’s
Massive
Growth

As
Mack
and
Schmidt
note,
Nvidia’s
business
has
changed
significantly
in
a
brief
period.
Between
2017
and
2022,
the
company’s
total
revenue
went
from
$7
billion
to
$27
billion.
That
growth
is
only
accelerating.
This
fiscal
year,
the
firm’s
annual
revenue
is
expected
to
more
than
double
to
$58
billion,
and
that
figure
is
estimated
to
cross
the
$100
billion
mark
by
2026.
That’s
a
factor
of
growth
of
14
times
in
10
years.

Nvidia’s
market
value
has
expanded
even
faster,
growing
from
roughly
$32
billion
in
2017
to
$1.2
trillion
now.
That’s
a
multiple
of
37.5
times
in
just
six
years.

The
main
driver
of
this
growth
is
the
company’s
data
center
business,
because
of
the
dazzling
demand
for
computing
power
from
hyperscalers
and
AI
workloads.
This
segment
represents
56%
of
Nvidia’s
revenue
in
2023,
up
from
12%
in
fiscal
2017.
By
2026,
its
share
of
revenue
should
reach
82%,
according
to
the
consensus.

The
Rise
and
Fall
of
Cisco
Stock

In
the
early
2000s,
Cisco
had
a
similar
superstar
status,
with
exceptionally
fast-growing
revenue
and
profits.
In The
Halo
Effect,
author
Phil
Rosenzweig
recalls
how
the
company
was
hailed
as
“the
king
of
the
internet.”

The
factors
leading
to
Cisco’s
prestige
included
chief
executive
John
Chambers’
charisma,
the
company’s
acumen
at
identifying,
acquiring,
and
integrating
targets
that
helped
diversify
and
complement
its
product
offerings,
and
its
“extreme
customer
focus,”
according
to
a
May
15
2000,
article
in Fortune.
Cisco
became
one
of
the
most
valuable
companies
in
the
world,
with
a
market
value
of
$555
billion,
surpassing
Microsoft
[MSFT].
However,
this
did
not
last.
The
firm
wasn’t
immune
to
the
downturn
in
the
economic
cycle,
nor
to
telecom
operators’
massive
capital
expenditure
cuts
after
the
internet
bubble
burst.

Nvidia:
Elevated
Expectations?

With
Nvidia’s
solid
fundamentals
and
expectations
for
rapid
growth,
investors
appear
convinced
its
story
won’t
end
any
time
soon.
The
stock
is
a
must-have
for
many
portfolio
managers
and
is
part
of
many
hedge
fund
portfolios,
according
to
a
Jefferies
report.

According
to
FactSet,
the
average
target
price
of
all
the
analysts
who
cover
the
stock
is
$666
per
share,
compared
with
a
closing
price
of
$481.
At
its
current
share
price,
Nvidia
is
trading
at
a
12-month
forward
EV/sales
multiple
of
about
22
times,
compared
with
a
historical
average
of
6
times
(which
is
more
than
2
standard
deviations
above
the
mean).
Cisco
reached
such
a
multiple
of
27
times
in
April
2000,
versus
a
historical
average
of
6
times
(and
a
current
ratio
of
three
times).

According
to
Morningstar’s
director
of
technology
Brian
Colello,
“Nvidia
was
a
much
larger
and
more
stable
business
prior
to
its
booming
growth,
[while]
Cisco
was
a
startup
growing
impressively
but
off
a
smaller
base.”

He
adds:
“much
of
Cisco’s
revenue
came
from
purchases
and
builds
in
anticipation
of
internet
growth.
With
Nvidia,
we
see
its
GPUs
put
to
use
right
away
to
train
AI
models.”

Also,
“Nvidia’s
GPUs
inherently
have
shorter
useful
lives
than
Cisco’s
networking
gear,
which
we
think
reduces
the
likelihood
of
overbuilding.”
Colello
thinks
Nvidia’s
stock
is
fairly
valued
after
the
company’s
third-quarter
earnings
and
bullish
forecast
for
its
fourth
quarter.

More
generally,
when
considering
market
conditions,
it
is
difficult
to
claim
whether
markets
are
in
a
bubble.
Some
niche
industries,
such
as
AI,
might
be
closer
than
others,
according
to
the
latest
survey
of
institutional
investors
from
Bank
of
America
(although
it
is
of
lesser
importance
than
high
inflation,
geopolitical
systemic
credit
events,
and
global
recession
risks).

Provided
the
world
economy
does
not
slow
more
than
expected
and
the
United
States
experiences
a
soft
landing
on
inflation,
market
conditions
could
remain
favourable
and
valuations
could
remain
elevated.
But
it’s
possible
that
if
inflation
does
not
fall
closer
to
the
Federal
Reserve’s
target
range,
higher-for-longer
interest
rates
might
devalue
highly
priced
stocks,
including
AI-related
ones.

Fundamentals
also
need
to
be
considered.
So
far,
Nvidia
has
enjoyed
a
quasi-monopoly
position
in
the
AI
space,
translating
into
high
demand
and
solid
pricing
power.
“Nvidia’s
growth
is
occurring
during
a
time
of
rising
interest
rates,
perhaps
going
against
the
grain
of
robust
capital
expenditures,”
says
Colello.
“Cisco
was
riding
a
nice
economic
wave
[in
the
’90s],
but
many
of
Nvidia’s
customers
are
cutting
spending
elsewhere
to
buy
its
GPUs.”

Nvidia’s
competitors,
like
Advanced
Micro
Devices
[AMD] and
Intel
[INTC],
are
trying
to
catch
up
and
take
advantage
of
the
fat
profit
margins
in
the
AI
space.
History
suggests
that
whatever
the
prospects,
over
the
long
run,
both
valuations
and
fundamentals
tend
to
return
to
the
mean,
since
highly
profitable
industries
tend
to
attract
competition,
provided
new
entrants
can
differentiate
from
incumbents
and
grab
market
share.

Morningstar
believes
Nvidia
has
a
wide
moat
“thanks
to
its
intangible
assets
around
graphics
processing
units
and,
increasingly,
switching
costs
around
its
proprietary
software,
such
as
its
Cuda
platform
for
AI
tools,
which
enables
developers
to
use
Nvidia’s
GPU
to
build
AI
models.”
For
long-term
investors,
fundamentals
should
be
the
most
crucial
factor
when
deciding
whether
to
buy
a
stock,
while
valuation
fluctuation
provides
opportunities
to
buy
it
when
it
becomes
cheap.
Whatever
your
view
on
Cisco’s
track
record,
that’s
one
condition
Nvidia
is
certainly
not
fulfilling
at
the
moment.

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