This Is Nuts – An Entire Market Chasing One Stock

  “When you sit down with your portfolio management team, and the first comment made is ‘this is nuts,’ it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended – ‘this is nuts.’” – January 11th, 2020.

I revisited that original post a couple of weeks ago as the market approached its 5000 psychological milestone. Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate.

Even one of the “always bullish” media outlets took notice, which is notable.

    “In a normal functioning market, Nvidia doing amazingly is bad news for competitors such as AMD and Intel. Nvidia is selling more of its chips, meaning fewer sales opportunities for rivals. Shouldn’t their stocks drop? Just because Meta owns and uses some new Nvidia chips, how is that going to positively impact its earnings and cash flow over the next four quarters? Will it at all?

    ‌The point is that investors are acting irrationally as Nvidia serves up eye-popping financial figures and the hype machine descends on social media. It makes sense until it doesn’t, and that is classic bubble action.” – Yahoo Finance

Lance Roberts

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Historic perspective for the NVDA bubble

 Enrique Abeyta

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Many folks recently have been referencing what happened to the stock of Cisco Systems, Inc. (CSCO) back then.

Dan points out sales grew from $5 million in 1988 to more than $22 billion by 2001. An incredible +4000% increase! That was REAL demand…

You will likely see a strong stock price when you grow revenue like that. Here is the stock chart from back then…


The stock peaked on March 27, 2000, at over $80 per share.

We are guessing you know what happened next, but here is that chart…


Almost 24 years later, the stock STILL has yet to reach those old highs.

We want to share an important chart regarding CSCO. Here is the revenue growth from 1993 through the present day…


https://stockanalysis.com/stocks/csco/revenue/

We spoke about the massive growth across the 1990s but look at what happened at the end of this period – CSCO revenue went DOWN.

It would continue to move higher and more than double, but it was going in the other direction for three years.

Could this happen to NVDA?

It certainly doesn't feel like it right now, as they are crushing numbers and growing like crazy. We remember those CSCO reports back in 1999, though, and they felt the same.

Back then, CSCO was making the "must have" networking equipment as every telecommunications company on Earth scrambled to build out the internet. These competitive companies would pay virtually anything at the time to get the equipment. In their mind, they couldn't afford to be left out!

Eventually, they got enough equipment to build out what they initially needed. In fact, they built out much MORE than was initially required and only needed to buy a little equipment for a while.

CSCO also built more capacity and was able to satisfy these customers. Unfortunately, they did so right as the customers realized that – in their excitement – they had built more than they needed in the near term.

In the meantime, competitors to CSCO who were way behind either caught up with better products or attractive pricing. The product wasn't as good, but it was cheaper, more available, and "good enough."

THIS is what we think will eventually happen to NVDA.

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