NVIDIA’s AI Boom is Similar to Cisco’s Internet Boom. Will the Similarities Extend to the Bust?
| December 13, 2023 |
- NVIDIA and Cisco have been leading players in their respective fields during periods of high capital expenditure and rapid industry expansion. However, they also share the likelihood of reaching a cyclical peak, which could lead to significant stock price corrections.
- NVIDIA (NVDA) has established dominance in AI advancements, where it already had a foot hold in the data center. Prior to this, NVDA was a key player in the cryptocurrency mining chips and graphics card markets.
- Since 2019, NVDA has continued its upward trajectory with a remarkable 716% revenue growth. The share price during this time also saw an increase of 1,491%
- Cisco Systems (CSCO) experienced a similar boom in the 1990s, becoming the leading infrastructure provider for the global internet buildout. From 1996 to its peak in 2000, Cisco’s revenue grew by 498%, while its share price dramatically increased by 3,278%. Eventually, it would collapse by 83%.
- Dominant players in capital goods markets, like NVDA’s chips and Cisco’s network routers, often experience significant pricing power during boom periods. However, this is typically followed by a bust characterized by over build out and a subsequent revenue decline.
- NVIDIA enjoyed a surge in purchases from Chinese companies just before export restrictions were implemented. This has led to significant overbuying and stockpiling of reserves in China, a market now mostly closed.
- The capital goods market is inherently cyclical. When a new product launches, there’s a significant uptick in adoption during the first cycle of a new technology as businesses explore its potential.
- High Growth and Great Margins during this surge often attracts new competitors, leading to a saturated market, more competition, fewer sales, lower prices, and lower profits.
- Wall St Analyst consensus predicts continued revenue growth of 60% through 2024 with indefinite mid-teens growth after that. We believe that this is overly optimistic. We expect revenues to stabilize and then decline, following a typical high-growth cycle pattern.
- Given the historical patterns, we believe exercising caution with NVDA is the best action.
