The run in Artificial Intelligence (A.I.) stocks this year has many analysts making comparisons to the 1999 “Dot.com” bubble. As shown in the chart below, there are some reasons for that concern. In 1999, Cisco Systems (CSCO) was the “belle of the ball,” and the “internet would change the world.” The thinking at that time was that the whole internet would run on Cisco routers at 50% gross margins. Today, Nvidia (NVDA) has 75% gross margins and 75% market share. Just as in 1999, extrapolated valuations rarely play out in reality.
As discussed recently, the valuations investors currently pay for companies like Nvidia (35x Price-to-Sales) are also unsustainable. As shown in the chart from TheMarketEar below, when 33x sales were Cisco’s valuation at its peak of the “Dot.com” mania, investors lost 85% of their money when the stock price troughed in October 2002. Over the next 16 years, as investors waited to break even, the company grew revenues by 172% and earnings per share by a staggering 681%
Lance Roberts
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