- Cisco was the poster child for the tech, media and telecoms bubble of 1998-2000 and its stock market valuation peaked at 5% of US GDP
- NVIDIA is leading the AI charge, and its market cap stands at 16% of US GDP
- Over the long term, Cisco delivered the substantial growth expected of it
- But there was a speed bump in 2001-02 as a capex boom turned to a bust
- And since 2000 Cisco’s sales have grown at a compound annual rate of 4.5%
“Michael Burry’s decision to buy put options and field against NVIDIA and Palantir, albeit in a structure to carefully manage the potential downside as well as the upside, further raises the temperature of the debate over whether AI-related stocks are in the midst of a bubble to match those that inflated and then punctured the valuations of the Go-Go technology stocks of the late 1960s, the Nifty Fifty of the early 1970s and technology, media and telecoms firms in the late 1990s,” says AJ Bell investment director Russ Mould.
“The sceptics’ main problem may not be so much with the potential of AI itself, but the valuation investors are paying for that potential and the rate at which they are expecting it to be fulfilled, and in both cases the bears may point to the experiences of Cisco’s shareholders in the late 1990s.
“In many ways, Cisco was the poster child for the technology, media and telecoms bubble of the late 1990s, as the leading provider of the telecommunications network equipment that formed the base of the broadband and internet boom.
“Its shares surged from barely $2 in 1995 to $80 at their March 2000 peak, buoyed by rapid increases in sales and earnings and expectations that further substantial growth would follow.
Source: Company accounts. Financial year to July.
“Cisco did deliver, too. Analysts are predicting annual sales of nearly $57 billion for 2025, with net income of $11.4 billion, forecasts which imply the top line will have more than trebled since 2000 and the bottom line more than quadrupled.
Source: Company accounts, Marketscreener, Zack's, NASDAQ, analysts' consensus forecasts
“However, none of this prevented an epic share price collapse. As the TMT bubble popped, Cisco’s shares peaked and then plunged all the way to less than $9 in 2002. Moreover, they have yet to recapture that March 2000 peak and still trade some 10% below it to this very day.
“That tale of share price toil highlights three issues.
“The first is just how hard it is to meet short-term expectations even if you can deliver against the long-term ones. Cisco lost sales and profit momentum in 2002 and 2003, as its customers cut back on capex, amid a broadband capacity glut, and some even went broke, undone by their own loosely funded expansion plans. The sudden, wrenching earnings disappointment stopped the share price in its tracks and persuaded momentum hunters to flee, while value-oriented investors still proved unwilling to get involved. As Warren Buffett once admitted with regard to his own firm, Berkshire Hathaway, ‘size is an anchor to performance’ and while Cisco can still point to very big increases in sales and after-tax profits since 2000, the trend growth rates look modest, thanks in part to the iron laws of mathematics and large numbers.
Source: Company accounts. Financial year to July.
“The second is how lofty valuations provide little downside protection if growth rates slow and start to disappoint. At its peak in 2000, Cisco had a stock market capitalisation of around $550 billion, more than 200 times the net income it earned that year. Looked at from another perspective, Cisco’s stock market valuation alone represented 5.5% of US GDP for the year 2000.
Source: LSEG Refinitiv data
“No-one can deny that NVIDIA is currently demonstrating phenomenal growth, as its chipsets help to power the data centres and servers that underpin the development of Large Language Models and provide the computing power that drives AI. But what no-one knows, yet, is whether the current capex boom will hit a speed bump to match that of networking equipment in the early 2000s, but it cannot be entirely ruled out as only really NVIDIA currently seems able to turn the AI development boom into profits and cashflow (though Alphabet may be doing the best of the rest).
Source: Company accounts, Marketscreener, Zack's, NASDAQ, analysts' consensus forecasts. Financial year to January.
“NVIDIA’s current rate of growth makes Cisco’s look pawky by comparison, and the silicon chip specialist generates fatter profit margins and higher returns on capital than the telecom equipment giant ever did.
“Buyers of the stock will also suggest that forward earnings multiples of 45 times and 31 times for the years to January 2026 and January 2027 respectively do not look as stretched as Cisco’s 200 times rating of 2000.
“Sceptics will counter that NVIDIA could yet encounter the law of large numbers, and that any sign of any slowdown in AI investment and its growth rates could lead to trouble – especially as NVIDIA’s near $5 trillion stock market valuation is the equivalent to the GDP of Germany and its eighty-million-plus inhabitants, not to mention one sixth of US GDP.”
Source: LSEG Refinitiv data
