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The investor who inspired The Big Short film in 2015 has hit the headlines after betting that tech stocks Nvidia and Palantir will fall in value. Hedge fund trader Michael Burry has bought financial products called ‘put options’ on these stocks and will profit if they decline in value.
The Big Short focused on traders who made millions from predicting the collapse of the US housing bubble in 2008. It made Burry a household name, hence why his reappearance in the news appears to have triggered a new bout of nervousness regarding the state of the markets.
Is history about to repeat itself?
The decision by Burry’s Scion Asset Management to buy put options and field against chip giant Nvidia and data specialist Palantir 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 technology stocks of the late 1960s, the Nifty Fifty of the early 1970s and technology, media and telecoms firms in the late 1990s.
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 shareholders in communication group Cisco 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.
| Cisco | $ billion | |||||
|---|---|---|---|---|---|---|
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | |
| Sales | 2.2 | 4.1 | 6.5 | 8.5 | 12.2 | 18.9 |
| EBIT | 0.8 | 1.4 | 2.1 | 2.7 | 3.4 | 4.9 |
| Net profit | 0.5 | 0.9 | 1.1 | 1.3 | 2.0 | 2.7 |
| Year-on-year change | ||||||
| Sales | 163% | 83% | 58% | 32% | 43% | 56% |
| EBIT | 159% | 77% | 53% | 26% | 27% | 44% |
| Net profit | 141% | 100% | 15% | 27% | 52% | 32% |
Source: Company accounts. Financial year to July. EBIT = earnings before interest and tax
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.
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 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.
| Cisco compound annual growth rate (CAGR) in revenues | |
|---|---|
| Since 1995 | 11.4% |
| Since 2000 | 4.5% |
| Since 2005 | 2.0% |
| Since 2015 | 1.4% |
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.
What’s the read-across to Nvidia?
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.
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 cash flow (though Google-owner Alphabet may be doing the best of the rest).
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.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
