E7: NVIDIA AI BUBBLE - We Can't Stay Quiet Any Longer

Summary

Larry, an experienced investor, analyzes whether we are currently in an AI bubble by comparing today's market to the dot-com bubble of 2000. He examines key metrics like the NASDAQ's price increase, high PE ratios, extremely overvalued IPOs, and parabolic stock moves. Concluding that by these measures, we are far from bubble territory, Larry then debunks the notion that Nvidia is akin to Cisco in 2000. He highlights Nvidia's exponentially greater earnings growth versus mere promised potential future profits for Cisco. With insightful analysis grounded in historical data, Larry makes a compelling case that we are not in an AI bubble.

Takeaways

• 😀 Larry lived through the dot-com bubble professionally and has studied what happened
• 👓 Key metrics show we are not in a tech bubble like 2000: lower NASDAQ returns, valuations, fewer parabolic stocks
• 📈 IPO frenzy in 1999/2000 much more extreme than today: average 70% day 1 pops, 165 IPOs doubled day 1
• 💰 Nvidia's profits and growth dwarf Cisco's in 2000 bubble; quality of Nvidia's customers also higher
• 🤑 Top 10 NASDAQ companies today have 12x more revenue than in 2000, but index price only 3.7x higher
• 🏦 Profitability of top companies today is real, not just promises like in 2000
• 👮‍♂️ Governments and top companies globally racing to build AI infrastructure and platforms
• 🧠 Generative AI seen as next phase of computing evolution - huge opportunities ahead
• 🔬 Nvidia leads in parallel computing hardware for AI with huge technology lead
• 😊 Conclusion: By metrics and experience, we are not in an AI bubble like 2000 dot-com bubble

Q & A

What were some key differences between the dot-com bubble and the current market environment?

Some key differences are: 1) The NASDAQ 100 went up 12x in 5 years during the dot-com bubble, but has only gone up 3x recently. 2) The PE ratio peaked at 175 during the dot-com bubble versus 42 now. 3) There were 20 stocks that went up over 900% in 1999, whereas now there is mainly just Super Micro up significantly. 4) Over 165 IPOs doubled on their first day in 1999-2000, whereas no recent IPOs have. 5) Companies today like Nvidia are actually highly profitable unlike many dot-com companies.

What evidence does Larry provide that we are not in an AI bubble specifically?

Larry points out that Nvidia, which people claim is emblematic of an AI bubble, is actually growing earnings much faster than its stock price. Additionally, AI-focused companies do not dominate the list of recent top performing stocks.

How did Cisco and Nvidia compare regarding profitability?

Nvidia made $29.7 billion in net income over the past year, which is 11x more than Cisco's best year ever. Also, Nvidia made more profit in the past quarter than Cisco did in its best year fiscal 2000.

What role did low quality customers play in the downfall of companies like Cisco?

Many of Cisco's customers during the dot-com bubble were speculative internet companies with little revenue or viability themselves. So when those customers went bankrupt, it severely hurt Cisco's business. This is different from Nvidia today whose big customers are extremely profitable giants.

What signals would suggest we are entering bubble territory?

Key signals would be seeing a rapid increase in IPOs for AI-related companies without strong fundamentals, seeing more stocks going parabolic with gains of 10-20x over short timeframes, and seeing index-level valuation multiples enter extreme territory again at 100+ PE ratios.

Why is it difficult for other companies to compete with Nvidia's leadership in AI hardware?

Nvidia has a multi-year technological lead, tremendous specialized engineering talent, and an ecosystem built around their CUDA platform. Competitors can't simply catch up to them overnight, so Nvidia's dominance should persist for some time.

Could today's market decline significantly without it being a bubble bursting?

Yes, absolutely. Markets can experience large corrections without it being the end of a speculative bubble. Key indicators to monitor would be extreme PE ratios collapsing along with fundraising mania ending versus a simpler revaluation lower based on higher interest rates and economic concerns.

What made Qualcomm's stock price rise over 4000% in the dot-com bubble?

At the time, Qualcomm was seen as a central play on the adoption of cell phones and mobile internet. However, sky-high expectations for profits were not met, and it became clear that cell phone adoption would not match the hype and speculation that drove such a dramatic price increase for Qualcomm stock.

Did stock prices often swing wildly intraday during the dot-com bubble?

Yes, Larry mentions stocks would frequently rise or drop 100 points or more in a single day. This was indicative of the extreme speculation and volatility during that period, very different than the current environment.

What lessons did Larry learn about investing from living through the dot-com bubble?

He learned the importance of technical analysis and sticking to stop losses. Larry follows a 100% technical process now, using moving averages to determine entry and exit points. This protects him from emotive decision making and big drawdowns.