Stock market bubbles follow the same pattern, as Nvidia and Cisco confirm – Chemicals and

CISCO 1990 – 2000, NVIDIA 2014 – 2024

Every stock market bubble is the same. It’s just the names and the themes that change.  Today’s bubble is about Nvidia and Artificial Intelligence (AI). Its supporters say it is going to conquer the world.

24 years ago, in the dotcom bubble, it was Cisco and internet networking.

As the chart of their share prices confirms, they both saw similar exponential gains in the decade before their share prices peaked. Cisco’s share price rose >1000% before peaking. And as the Financial Times noted in 2021:

“The thesis was solid: as a provider of networking equipment for both telecom players and other businesses, Cisco was the shovel-seller in a dot com gold rush. What could go wrong?

“In one way, investors were right. Cisco was a big winner. Over the next 21 years, Cisco’s revenues grew fourfold to $49bn, with profits quintupling to $11bn.

“The problem was the share price. It was, simply, too damn high. At the March 2000 peak, Cisco’s price-to-earnings ratio stood at 201 times, its enterprise value to sales at 31 times and its price-to-free cash flow at 176 times.

“And, suddenly, everyone cottoned on. Over the next two years, Cisco’s share price collapsed 80%, a total market capitalisation loss of $431bn.”

Cisco’s stock peaked in March 2000 at $54, and took 21 years to (briefly) regain that level. Today, it is lower again at $46.

NVIDIA IS NOW WORTH MORE THAN EUROPE’S MAJOR STOCK MARKETS

Figure 1: Market cap of Nividia vs. Broad stock indices of Germany, France, UK

Nvidia has done even better. Its market capitalization was $400bn just 2 years ago. But since October, as AI-fever took hold, its value has soared. It reached $1tn early this year – and kept going:

• It became the world’s most valuable stock this month, overtaking Microsoft, Apple and other favourites to be worth $3.3tn
• And as the Deutsche Bank chart confirms, it is now worth more than every listed stock in Germany, in France, and in the UK.

It is the classic definition of a bubble. Its value rose from $2tn to $3tn in just 30 trading days as investors from around the world became terrified of missing out.

This was the fastest increase in history.

NVIDIA IS CARRYING THE RISE IN US MARETS 

NVIDIA accounts for 34.5% of returns in the S&P 500 in 2024

Unsurprisingly, Nvidia has also had a major impact on the US S&P 500 Index.  As Apollo’s chief economist warned earlier this month:

“35% of the increase in the S&P 500’s market cap since the beginning of the year has come from one stock

• Such a high concentration implies that if NVIDIA continues to rise, then things are fine
• But if it starts to decline, then the S&P 500 will be hit hard.

“The bottom line is that the extreme concentration of returns in the S&P 500 makes investors more vulnerable to single headlines impacting the one stock driving index returns.“

ALL BUBBLES EVENTUALLY BURST

Figure 1: Short interest on the SPY and QQQ US ETF

The problem with bubbles is simple. They are great fun for those involved while they last. But as with blowing up a balloon, they need more and more air to keep them growing.

And eventually, the supply of new air can’t keep up. As famous investor Bob Farrell warned in his rule No 4:

“Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.”

Eventually, everyone who wants to invest has placed their bet. And at that point, markets start to listen to new voices. Today, there are plenty of people arguing that AI is more about promise than actual performance.

The JP Morgan chart is also cautionary. It shows that more or less everybody who wanted to buy the NASDAQ and S&P 500 Indices has bought. There are almost no short-sellers left.

This doesn’t mean that Nvidia is a bad company.  And there is no doubt that AI can be very useful in many key areas.

It has been used to fly planes for decades, for example. And it will probably be used to drive Autonomous Vehicles in the next few years.

The issue is simply that Silicon Valley is very good at generating hype for its products. And so Nvidia’s share price is more likely to follow Cisco’s path, than to keep on climbing forever.