Here is a chart which I have carefully designed to make as scary as possible:
That is the percentage price appreciation of Nvidia NVDA 0.00%↑ over the past four years, lined up against the share price appreciation of Cisco in the four years leading up to August 11 2000. The reason the chart is scary is not simply because of the dizzying ascent of the two tech companies. It is scary because the stories driving the two stocks at the two time periods depicted are remarkably similar. Cisco was pitched as the crucial infrastructure provider for the internet revolution — whatever the internet became, we were told at the end of the last century, it would use Cisco switches and routers to become it. Nvidia is pitched as the crucial infrastructure provider for the artificial intelligence revolution — whatever AI becomes, we are told, it will use Nvidia chips to become it.
What makes this similarity unsettling is the price return of Cisco since August of 2000:
The stock has gone from $64 to $54 over the intervening 23 years; include dividends, and investors are just about breaking even. It’s been a horrible couple of decades, and the crucial point about its horribleness is that Cisco’s underlying results over the period have been very good. Cisco earnings per share have grown at a compound annual rate of just under 10 per cent since 2000. But Cisco shares were so expensive at the outset that the growth of the past 20+ years couldn’t save it.
How expensive was Cisco? Here are the trailing PE ratios of the two companies over the same periods depicted in the first chart:
I could have picked a different time period to make the run-up in Cisco’s and/or Nvidia’s stock price more or less extreme. But the trailing P/E ratios are what they are, and Nvidia is even more expensive than Cisco was in 2000 on this metric.
Insider Stock Sales
Gaining insight from insider stock transactions is a tricky endeavor. For billionaires like Zuckerberg or Elon Musk, stock sales are often planned far in advance & give us little actionable insight about their companies.
Tracking insider stock transactions is really only helpful when you see an overwhelming amount of transactions in one direction (buying or selling).
Here are the YTD transactions for the Nvidia execs:
To drive this point home, here is a visual representation of insider transactions over the past year:
This totals up to roughly $275 Million of stock selling by the Nvidia CEO, CFO, and other corporate board members over the past 9-12 months.
If we zoom out to hedge funds & institutions with the largest ownership of Nvidia, you’ll see that 5 of the 9 largest shareholders have collectively trimmed their holdings by ~15%.
Nvidia Management
Nvidia’s management say that investors should use a non-GAAP [generally accepting accounting principles] calculation of their earnings per share. And Wall Street analysts obediently do exactly that. Using non-GAAP calculations, the stock looks less expensive — 133 times trailing earnings rather than 212 times, a bit cheaper than Cisco was.
But using non-GAAP earnings for a company like Nvidia means you exclude the costs of share compensation and merger-related costs, which should absolutely never and almost never, respectively, be excluded from earnings. This is why overall, using GAAP to calculate earnings is more reliable!
It’s also interesting to look at NVIDIA’s price/sales ratio relative to it’s peers. Today it is 25x. That means every $1 in sales adds $25 to the stock price.
Is the current fiscal year for NVDA 0.00%↑ an exceptionally good one & a cyclical peak in earnings? Or is it just a new plateau from which Nvidia will strongly build upon? I don’t know, and only time will tell.
But I do think at this point, the downside risks greatly outweighs the upside.