Dot-com bubble feels ‘very similar’ to today’s environment

With Nvidia up over 154% year to date, Stifel managing director and chief equity strategist Barry Bannister joins Morning Brief to give insight into Nvidia’s (NVDA) recent moves and how the tech giant reminds him of Cisco’s (CSCO) performance during the dot-com bubble.

“What happened with Cisco (CSCO) is, and same thing happened to Microsoft (MSFT), and Amgen (AMGN) and a number of other big cap stocks, is their PE multiple was too high and they earned into it over the course of the next 15 years. So the earnings went up dramatically, as was expected. This happened with the nifty 50 stocks in the early 70s. They earned very well, but their PE multiples were too high … those companies had these mid-30s, 40-time multiples. They earned into it over the course of a decade,” Bannister explains.

He outlines the similarities between the dot-com bubble and the AI sector today: “But what we have today is extreme optimism on new technology. Then it was the internet, now it’s AI. Narrow markets, increasingly narrow markets with a high valuation. Equity ownership was very high. And the day traders and all that. I’m just saying that you have to have been there 25 years ago to remember that it was a very similar feeling environment today.”

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This post was written by Nicholas Jacobino

Video Transcript

Barry, going back to what you were just saying a minute ago here, when we talk about some of the pressures that we could see on the broader market, you mentioned the fact that NVIDIA could be the next cisco.

I’m curious more.

So why just given the valuation gaps that we’re seeing is not exactly an apples to apples comparison?

So what is it about NVIDIA that you’re seeing that makes you a bit worried that this could end up like the next, next cisco.

Well, yeah.

Uh when I say the next, they’re already what Cisco was back in 1999.

So they are the largest company.

They are the darling.

Uh But the valuation difference, you know, consider that semiconductors are capital goods, they’re very small short cycle, early cycle capital goods.

Um They uh don’t typically get an enormous multiple like you would give to a very high ro ic low incremental cost company like uh software uh where there’s enormous return on capital.

Sure, they’re getting the build out of A I.

But once you build a bridge, you don’t need to build it twice.

So the build out will not be a continuous process that you can discount over 45 times earnings, um over 45 years even with growth.

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So that’s one thing to consider.

The other is that if on NVIDIA specifically, uh it’s called the second derivative, the change in the rate of change of analyst EBD a revisions.

That’s the thing that we found that guides the stock.

So if you look at the year to year change of NVIDIA stock, it’s the year to year change of the change.

The revisions and analyst Eva Da estimates, we published a note on this and uh that has rolled over decisively two quarters ago.

So what we think is the stocks, year to year change will diminish, it’ll still be positive, but it looks for a correction.

Uh I would say probably in the high eighties uh by the uh late third quarter and Barry just lastly here, uh you know, one of the huge things that we saw with Cisco was a major pullback after the.com bubble.

Do you anticipate the same type of stock correlation where investors are gonna say?

OK, who else are they possibly gonna sell to?

And then you just see a range bound company for an extended period of time.

No, what happened with Cisco is um and same thing happened to Microsoft and uh Amgen and a number of other big cap stocks is their pe multiple was too high and they earned into it over the course of the next 15 years.

So the earnings went up dramatically, uh, as was expected, this happened with the nifty 50 stocks in the early seventies, they earned very well, but their pe multiples were too high.

Their pe ratios, the nifty 50 in the early seventies.

If you look that up on Wikipedia or uh, Chad GP T um, that if you look it up, you’ll see that those companies had these mid thirties, forties time multiples they earned into it over the course of a decade.

But what we have today is extreme optimism on new technology.

And it was the internet.

Now, it’s the A I narrow markets, increasingly narrow markets with a high valuation.

Equity ownership was very high.

And the day traders and all that, I’m just saying that you have to have been there 25 years ago to remember that it was a very similar feeling environment today.

I was just opening up my E trade account back then, Barry, I was just getting things started.

I wish I was around for it.

I was a securities analyst.

Uh and uh had been one already for 20 years and uh uh it was uh or nearly 20 years and uh I covered industrial stocks and so uh I was very close to the cyclical world.