Hello,

The worried murmurings of a supposed AI “bubble” have been growing louder of late. They were perhaps given encouragement by one Michael Burry, who famously predicted the US housing market collapse and was portrayed in the film The Big Short. Burry created headlines last week when he compared Nvidia to Cisco during the Dot-Com bubble.

Those familiar with Cisco’s story may have been suitably fearful of such a comparison coming from such a source. Similar to Nvidia, Cisco was the largest hardware provider of a new technological age and, similarly again, was briefly the world’s highest valued company. That was before its stock price plummeted -85%.

But how accurate is this comparison? Let’s do a quick analysis from a fundamental perspective. We’ll use forward P/E ratios, which is simply a company’s current stock price divided by its expected future earnings. To oversimplify: The higher the ratio, the more ‘expensive’ the stock, and the lower the ratio, the ‘cheaper’ the stock:

 

• Nvidia’s current forward P/E is approx. 23.5, having been above 57 in 2021.

• At the peak of the Dot-Com Bubble, Cisco’s forward P/E ratio was 131.

So, while you may be right in thinking that Nvidia isn’t cheap, it isn’t close to the extremes that Cisco traded at. That doesn’t mean that Nvidia is immune from a price correction in the future, but be wary of statements like, “the market is doomed to repeat itself”. Comparisons made using similarities to 25 years ago tend not to fully appreciate the very real differences that are also present.

As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.