NVIDIA and the Cautionary Tale of Cisco Systems
NVIDIA, the giant semiconductor company founded by Taiwanese American Jensen Huang, seems invincible these days. Annual revenue has more than doubled since 2020. Its stock price has more than doubled this year and is up more than 700% over the past five years. It is one of the rare trillion-dollar market-cap companies.
Perhaps most intriguingly, NVIDIA is a leading company in the biggest tech-driven trend to come along in years, artificial intelligence. It makes the chips that power AI-based computer systems, and it sells the software and services companies need to operate their own AI programs. And NVIDIA was a big company before AI took off.
As if to emphasize the point, this week the company posted third-quarter revenue of US$18.1 billion—tripling from a year ago and setting a company record. Earnings were also a record at US$10 billion.
NVIDIA meets all our core criteria for a quality growth company: It has a sustainable business and a competitive advantage, solid management, and financial strength. Over the last six years, its revenue has grown from nearly US$7 billion in fiscal 2017 to just under US$27 billion in fiscal 2022.
But as NVIDIA reaches dizzying valuations—it currently trades at 118 times earnings—we can’t help thinking of another good technology company whose stock once commanded nose-bleed premiums: Cisco Systems.
Cisco makes the networking equipment that enables much of the internet. As the World Wide Web was taking off in the mid-1990s, Cisco Chief Executive John Chambers was telling people a new era of computing was coming, and the company’s hardware played a big part in making that new era real. Between 1995 and 2000, its revenue surged 850%, from about US$2 billion to US$19 billion.
Cisco stock did even better, growing an incredible 3,800%, from US$2 in January 1995 to US$79 in March 2000. The title of its 1999 annual report exhorted investors to “Capture the Momentum.” Many took that advice. In March 2000, at the height of the dot-com bubble, Cisco became the most valuable company in the world, with a market capitalization of more than US$500 billion.
Then the dot-com bubble burst. Cisco shares fell 88%, dropping from US$79 to a low of US$9.50 two years later. That drop wasn’t the result of any large change in the company’s performance. Revenue was nearly US$19 billion in fiscal 2000, US$22 billion in 2001, and about US$19 billion in 2002. But the premium that investors were willing to pay for the company disappeared as the hype around the web faded.
Over the next two decades, Cisco kept growing. Its sales in 2022 were nearly US$52 billion, more than double the US$19 billion it hit in 2000. Yet its stock has never traded as high as it did on March 1, 2000. Today it’s at roughly US$53. On a total return basis, it took 20 years for Cisco stock to recover from the dot-com crash.
So, are there lessons we can learn from Cisco as we look at NVIDIA? Just as Chambers argued 25 years ago that a new era of computing was at hand, Huang has been talking up AI. Just this month he said “In the last 40 years, nothing has been this big. It’s bigger than PC, it’s bigger than mobile, and it’s gonna be bigger than the internet, by far.” The enthusiasm for AI’s future has led to very high valuation multiples for NVIDIA, although not as high as Cisco reached in 2000.
NVIDIA, the giant semiconductor company founded by Taiwanese American Jensen Huang, seems invincible these days. Annual revenue has more than doubled since 2020. Its stock price has more than doubled this year and is up more than 700% over the past five years. It is one of the rare trillion-dollar market-cap companies.
Perhaps most intriguingly, NVIDIA is a leading company in the biggest tech-driven trend to come along in years, artificial intelligence. It makes the chips that power AI-based computer systems, and it sells the software and services companies need to operate their own AI programs. And NVIDIA was a big company before AI took off.
As if to emphasize the point, this week the company posted third-quarter revenue of US$18.1 billion—tripling from a year ago and setting a company record. Earnings were also a record at US$10 billion.
NVIDIA meets all our core criteria for a quality growth company: It has a sustainable business and a competitive advantage, solid management, and financial strength. Over the last six years, its revenue has grown from nearly US$7 billion in fiscal 2017 to just under US$27 billion in fiscal 2022.
But as NVIDIA reaches dizzying valuations—it currently trades at 118 times earnings—we can’t help thinking of another good technology company whose stock once commanded nose-bleed premiums: Cisco Systems.
Cisco makes the networking equipment that enables much of the internet. As the World Wide Web was taking off in the mid-1990s, Cisco Chief Executive John Chambers was telling people a new era of computing was coming, and the company’s hardware played a big part in making that new era real. Between 1995 and 2000, its revenue surged 850%, from about US$2 billion to US$19 billion.
Cisco stock did even better, growing an incredible 3,800%, from US$2 in January 1995 to US$79 in March 2000. The title of its 1999 annual report exhorted investors to “Capture the Momentum.” Many took that advice. In March 2000, at the height of the dot-com bubble, Cisco became the most valuable company in the world, with a market capitalization of more than US$500 billion.
Then the dot-com bubble burst. Cisco shares fell 88%, dropping from US$79 to a low of US$9.50 two years later. That drop wasn’t the result of any large change in the company’s performance. Revenue was nearly US$19 billion in fiscal 2000, US$22 billion in 2001, and about US$19 billion in 2002. But the premium that investors were willing to pay for the company disappeared as the hype around the web faded.
Over the next two decades, Cisco kept growing. Its sales in 2022 were nearly US$52 billion, more than double the US$19 billion it hit in 2000. Yet its stock has never traded as high as it did on March 1, 2000. Today it’s at roughly US$53. On a total return basis, it took 20 years for Cisco stock to recover from the dot-com crash.
So, are there lessons we can learn from Cisco as we look at NVIDIA? Just as Chambers argued 25 years ago that a new era of computing was at hand, Huang has been talking up AI. Just this month he said “In the last 40 years, nothing has been this big. It’s bigger than PC, it’s bigger than mobile, and it’s gonna be bigger than the internet, by far.” The enthusiasm for AI’s future has led to very high valuation multiples for NVIDIA, although not as high as Cisco reached in 2000.
Your trees got infected? Tough luck, if you have to start from scratch, you're gonna need 4-5 years - at least - for a first so-so harvest of smallish cocoa pods; a few years longer to get back to normal production.