Chipmaker Nvidia has seen its market capitalization more than triple this week. Trillion dollars, surpassing Microsoft to become the world’s most valuable company.
This historic surge has been compared to the frenetic days of the dot-com era almost 30 years ago. Is that true?
As for Nvidia, it’s probably not a bubble, at least not yet. In fact, investors have plenty of reason to remain optimistic about the chipmaker’s future prospects.
Artificial intelligence (AI) has the potential to unlock new capabilities for people, businesses and economies.
AI turns computers into thinking machines that can plan, reason and understand, rather than simply taking and processing data.
Driving this new era of computing is the super-fast graphics processor unit (GPU), invented by Nvidia in 1999.
Initially designed for gaming, GPUs break down AI tasks into small chunks and run them simultaneously, making them ideal for the intensive calculations needed to train AI models.
Nvidia’s GPUs dominate the market.
Nvidia’s stock performance reflects the fundamentals of the company’s core business.
That’s why Nvidia is by far the best “pick and shovel” for finding value in the current AI gold rush.
But does Nvidia represent a new technology paradigm?
As the saying goes, history doesn’t repeat itself, but it often rhymes. In the 1990s, Cisco Systems represented the new Internet era.
The company’s stock price soared more than 1,000-fold between its initial public offering in 1990 and a peak of $80 per share in 2000, giving it a market capitalization of $555 billion, making it at one point the largest company in the world.
Even as the dot-com bubble was showing signs of bursting, analysts were praising Cisco’s stock price and leadership.
On the cover of Fortune magazine in May 2000,John Chambers posed the question: Is Cisco the best CEO on the planet? and concluded, “By all accounts, Cisco is a buy.” The company’s stock eventually fell to $8.60.
Canada’s Nortel Networks provides yet another cautionary tale.
To one point, Nortel’s market capitalization was $398 billion.representing one The third It represents 10% of the value of the entire Canadian public market. It reached a peak in 2000 but eventually declared bankruptcy in 2009.
Nvidia’s rise has been compared to those dot-com companies. Wall Street Journal darling and LuciferThe financial research firm pointed to soaring stock prices and high expectations in response to the dot-com fever.
It would be an oversimplification to say Nvidia will follow in the footsteps of Cisco or Nortel.
First, while Nvidia is making huge profits, it has yet to reach the lofty valuations of the dot-com era typified by Nortel and Cisco.
The company is expected to double its revenue and nearly quadruple its profits in 2024, yet trades at less than half the price-to-earnings multiple that Cisco was at its peak.
Nvidia also sells GPUs to the largest, most profitable companies, so-called “hyperscalers,” such as Microsoft and Amazon, which are unlikely to stop placing orders anytime soon.
But Nvidia and Cisco are similar in one key area: They’re both providing infrastructure for a new era of computing.
Cisco’s networking hardware and communications equipment connected computers around the world during the early days of the Internet.
Owning Cisco was like “owning a piece of the Internet.”
Now, Nvidia’s superchips are training massive language models that will transform the role of computing in the next era.
Both eras have something in common: the unknown.
Like the Internet in the 1990s, the 2020s AI era is so new that its use cases are underdeveloped and poorly understood.
Since there was no option to invest in Internet products and services, Cisco was the option.
Today, the same can be said about Nvidia.
But the winners in the Internet age have not been infrastructure companies like Cisco, but companies that have used the web to upend old industries, as Amazon did with retail, or that have created new markets, as Facebook did with social networking and Google did with online search.
Nvidia may grow into an even bigger behemoth than it is today.
But the next wave of AI growth will likely come from the application layer, like software for fully self-driving cars and humanoid robot companions.
The good news for AI bulls is that we are probably in 1997, not 2000, and the peak may still be a long way off.
But history doesn’t repeat itself, so we should listen for rhymes.
Alex Tapscott, CFA, is the author of Web3: Charting the Internet’s Next Economic and Cultural Frontier, Managing Director of the Digital Asset Group, a division of Ninepoint Partners, and a Portfolio Manager at Ninepoint Partners.
