Investors should mull parallels between Cisco Systems' valuation during the dot-com bubble in 2000 and the artificial intelligence driven surge in Nvidia stock, says economist Ed Yardeni. While cloud computing giants are driving demand for Nvidia's AI chips, he cautions that demand for Cisco's computer networking gear suddenly dried up.
In addition, Nvidia stock has surged 81% in 2024 after a big rally in 2023. Nvidia stock popped 239% last year.
On the stock market today, Nvidia stock fell 3.2% to 879.44.
"It's easy to compare Nvidia in 2024 and Cisco in 2000," said Yardeni in a report to clients. "They both sell the equipment needed by companies keen on breaking into a hot, new technology. In 2000, that new technology was the internet. Today, it's artificial intelligence. In 2000, Cisco sold routers and networking equipment and still does so today. Nvidia sells specialized semiconductor chips."
More buzz on Nvidia stock is expected next week when the chipmaker hosts its four-day GTC conference. Nvidia is expected to update its road map for introducing new AI chips amid growing competition from Advanced Micro Devices.
Dot-com Bubble Comparison
Yardeni went on to make these points:
· While Nvidia may not be as expensive as Cisco was at its peak, during the largest bubble in recent history, that does not mean that Nvidia isn't expensive when compared to more typical overvalued market benchmarks. Cisco's shares gained 761.8% from the start of 1998 through its peak on March 27, 2000. That far exceeds Nvidia's 215.1% gain from the start of 2022 through Nvidia's peak on March 7, 2024.
· When the bubble bursts, things can go south fast. By March 2001, Cisco was announcing widespread layoffs, its first in the company's history, along with massive cost-cutting plans. Cisco's share price fell 90% from a peak of $80.06 in March 2000 to a low of only $8.06 in October 2002. At a recent $50, the shares have yet to revisit their 2000 peak, but at least the company survived and continues to operate today.
Cloud Giants Drive AI Chip Demand
· Nvidia has lived through booms and busts over its 30 years and hopefully it's watching its inventory levels — and those of its customers — closely. The company reported that 19% of its sales last fiscal year came from one end customer, which a Feb. 22 WSJ article reported is presumably a cloud computing company like Alphabet's Google, Amazon.com, or Microsoft. One of the risks Nvidia mentions in its fiscal 2023 annual report is a failure to anticipate customer demand properly, which could lead to mismatches between supply and demand.
· Those looking for a reason to sell Nvidia shares should watch the demand for the company's chips. Right now, demand is off the charts, with CEOs like Meta Platform's Mark Zuckerberg saying his company will have purchased 350,000 H100 graphics cards from Nvidia by the end of 2024, a Jan. 18 CNBC article reported. He didn't say how many cards the company currently owns or how many Meta will buy in 2025, but continued demand from large customers will be key.
Nvidia Stock: PHLX Index Hit Record High
A bellwether for AI stocks, chipmaker Nvidia reported fourth-quarter sales that tripled from a year earlier, beating high expectations.
Also, Nvidia is among AI stocks to watch. Meanwhile, Cisco stock has retreated 1% in 2024.
In 2024, chipmakers are outperforming software companies as the top AI stocks. But some investors may be taking profits in chip stocks.
The PHLX Semiconductor Index fell 2.5% on March 13. Also, the PHLX index was down 1% to 4,815 on the stock market today.
The PHLX index hit a new record high last week.
Cisco stock advanced 6% in 2023. The Nasdaq composite climbed 43% in 2023 amid the buzz over AI stocks.
Follow Reinhardt Krause on X, formerly Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
