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's biggest customers are : MSFT Meta Amazon Alphabet Soon those customers will make their own Processing Unit chips. Then Nvidia chart will be similar to Cisco chart.
Governments will buy nvidia when the hyper scalers design their own processors though the grok processor is faster and going from 14nm to 4nm.
This is a pipe dream that short sellers always tell you. Short sellers have done real well so far haven't they? If it was that easy to do these companies which have more money than God would have done it already. You should sell all your assets and go short in NVDA right now if it this simple.
A Terrific Company, But More Cyclical Than You Think Nvidia is no doubt a revolutionary company. The AI language models that it helps power are changing the world. Search has become faster and easier than ever before, and AI will not stop there, with many more use cases on the horizon. However, much of this revolution is now baked into Nvidia’s financials, with net income having increased from $4.37 billion in year-end 2023 to $29.76 billion in year-end 2024. This is an enormous increase. Nvidia and the AI revolution look comparable to Intel (NASDAQ:INTC) in the Internet revolution of the late 1990s. I recently checked Intel’s financials from 1993-2000, the period marked by the inception of the Internet. Intel’s net income increased at a much slower pace than Nvidia’s. It took seven years for Intel’s net income to increase 360% vs. one year for Nvidia’s net income to increase 581%. During the recession of 2001, as the Internet bubble deflated, Intel’s net income collapsed 88% from year-end 2000 to year-end 2001. I suspect Nvidia’s profits will be no less cyclical than Intel’s. Yet, the market is pricing in an unending upward trend in the company’s earnings. The fact that Nvidia’s net income increased so fast means there’s less growth ahead, not more. If Nvidia’s customers suffer in a recession, which I believe they will, Nvidia will suffer too in terms of falling earnings. In Nvidia’s annual report, the company outlined these risks, saying, “Because most of our sales are made on a purchase order basis, our customers can generally cancel, change or delay product purchase commitments with little notice to us and without penalty.” Competition Is Coming Nvidia’s operating margin is at a record high of 54%, but if we look at the company’s history, its average operating margin is closer to just 20%. In a cyclical industry like chip designing, this is a red flag. It means earnings could fall more than 50% just to get back to the norm. In recessions, things can get even worse. Nvidia’s operating margin approached the low single digits in the recession of 2003 and went negative in 2009. There are two reasons Nvidia’s margins could contract. One is the economic weakness we discussed earlier, which could affect Nvidia’s customers. Two is increasing competition, which is now coming from everywhere, including Nvidia’s own customers. This risk was outlined in Nvidia’s annual report, which stated, “Our partners or customers may develop their own solutions; our customers may purchase products from our competitors; and our partners may discontinue sales or lose market share in the markets for which they purchase our products.” All the semiconductor investment we’re seeing, spurred by AI hype and governmental support, is bad news for Nvidia. Big tech companies are spending billions on in-house solutions, Advanced Micro Devices (NASDAQ:AMD) and Intel are racing to catch up, and China is attempting to become semiconductor self-reliant. I hate industries that are seeing a lot of investment and increasing competition because that’s usually bad for future profit margins. Nvidia was developing AI solutions in a sleepy market for years, but that has all changed now. AI is the hottest market there is, and new competitors are spending R&D money hand over fist. For this reason, I cannot be sure who will have the technological edge in 10 years’ time. Just as Intel has, Nvidia could easily lose its edge over the years. NVDA Stock’s Valuation Is Extreme Despite having seen its net income and margins explode upwards, Nvidia is now trading at 76x earnings, 36x sales, and 51x book. Normally, you see the market pricing in that a company is nearing a cyclical peak when earnings surge 581% year-over-year by assigning lower multiples. However, this is certainly not the case for Nvidia. Is NVDA Stock a Buy, According to Analysts? Currently, 39 out of 41 analysts covering NVDA give it a Buy rating, two rate it a Hold, and zero analysts rate it a Sell, resulting in a Strong Buy consensus rating. The average Nvidia stock price target is $989.53, implying upside potential of 9.2%. Analyst price targets range from a low of $620 per share to a high of $1,400 per share. The Bottom Line on NVDA Stock I believe Nvidia is comparable to Intel near the peak of the dot-com bubble. Intel benefited from the Internet boom, with a dominant position in semiconductors used in PCs and technologies used for Wi-Fi. However, as competition increased, overinvestment ran rampant, and demand fell, Intel’s stock and earnings collapsed alongside those of other dot-com names. The same could happen to Nvidia as semiconductor investment has surged in big tech land and China. With a 581% year-over-year increase in earnings, Nvidia’s profits could be nearing a peak. The next recession may mark the end as orders for Nvidia’s products can quickly be canceled due to an industry-specific downturn, wide-scale recession, or substitution for another company’s products.
I would advise a pinch of caution shorting Nvdia (I'm not talking about intraday, etc., I mean swing/long term, cost averaging, etc). Think of agricultural products. Some crops can be harvested multiple times per year, particularly in tropical countries or in greenhouses (think watermelons, cucumbers, tomatoes, lettuce, etc.). Bad harvest/season? No biggie. Most crops can be planted, grown and harvested within a year or a bit less (think wheat, corn, soybeans, apples, etc.). Bad harvest/season? It sucks, but next year you're back to normal or, in many cases, overproduction (because of higher prices). Now think of your favorite crop in the world: cocoa! 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. Semiconductors, specially advanced ones, are e-cocoa. Even if you manage to get the money (lots), the talent (scarce), the energy (at what price), the water (not just any water, the purest you can find in ridiculous amounts), etc. you're still years away from producing a single chip. During the pandemic, car factories and others stopped operating, not because they lacked tires, steel, etc., but because they lacked chips. This is a huge bottleneck that is not going to be resolved in years, no matter how much money governments and companies throw away at it (although the money will help). The stock market will go up and down, Nvidia will go up and down, other chip companies will go up and down (INTC is going down hard because they're having a hard time delivering chips *soon enough*), but for the next few years, this sector should outperform the index, and the dominant players (NVIDIA and TSMC) should out perform their peers. PS: Cisco technology was easier to copy/steal/replicate by you know who. PS2: not talking my book Just so you ponder a counterpoint.