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Is NVIDIA nothing more than the Dot-com Bubble version of Cisco?

When Cisco's stock peaked during the dot-com bubble, investors were left pondering: is this the birth of a new tech giant or the start of a dangerous bubble? Well, we know the answer.

Cisco's dramatic rise in the year 2000 saw its price-to-earnings ratio reach nearly 200 times, driven by the optimistic dreams investors had about the company and the internet revolution. While e-commerce certainly did transform our global economy, Cisco didn’t go on to conquer the world.

It would, therefore, be smart to take a long, hard look at NVIDIA and think about whether it too will follow the same path as Cisco as AI transforms our world. Investors seem to believe it will, as NVIDIA has seen its stock surge by an astounding 265 per cent since late 2022. Unlike Cisco, however, NVIDIA enjoys a quasi-monopoly in the AI space, with strong demand and solid pricing power.

Another point to mention is that NVIDIA’s current valuation is also lower than Cisco’s at its peak on a price-multiple basis, which you can see in the chart below.

But there are some similarities to the dot-com period and Cisco. The AI boom, much like the dot-com boom in the early 2000s, promises transformative technological advancements. For investors, the challenge lies in discerning whether NVIDIA represents a sustainable technological leap, or whether it forms just a small part of a much larger AI trend. Even if its valuations seem more moderate compared to Cisco, they should still be challenged.

Source: The Wall Street Journal

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