There’s an interesting article in the Financial Times today in the Unhedged opinion column (Robert Armstrong and Ethan Wu) titled “Nvidia 2023 = Cisco 2020?”

It points out that CSCO, a maker of networking hardware and software, had a fabulous run from August 1996 through 1999, posting a 10x gain over the period. It has pretty much gone 0-for-the-21st-century since. It lost 80% of its value in early 2000, as the Internet bubble popped, and is still 20% below its last-century close.

NVDA has had an eerily similar run to CSCO’s sunshine period over the past several years. The implicit question: what’s next? The implicit answer: nothing good.

Unhedged admits that it has made the comparison deliberately scary, by cherry-picking starting/ending dates for its charts. This is, in my view, also an illustration of the shifty nature of charts, whose axes can be bent and twisted to support almost any conclusion (not a big issue here, though).

picky, picky

There’s a picky (in this case) point to be made about interest rates. Stocks don’t exist in an investment vacuum. They compete for your money and mine, based on expected returns, with the other two liquid investment types–bonds and cash (and, for some, maybe foreign currency, gold, diamonds and crypto). Anyway, the 10-year Treasury was yielding 6.5% or so as CSCO was topping, vs. 4.1% today. This suggests, to me anyway, that the speculative fever behind CSCO a quarter-century ago was much higher than that behind NVDA today.

the much more important point

The main argument behind the chart behavior, as I see it, has to do with the nature of growth stocks. In my experience, the typical great new idea that sends a stock headed for the sky has about a five-year shelf life. The great companies reinvent themselves. The rest, which is the vast majority of growth companies, fall by the wayside.

For example:

Walmart (WMT) started out building variety stores with lots of low-priced merchandise at the edges of small towns in the US. As that business began to mature, it expanded into Mexico (other international efforts weren’t so hot). Then it opened Sams warehouse clubs. Then it added groceries to compete with traditional supermarkets. All the while, it worked on its logistics network to make every operation more profitable. All this created a highly unusual, multi-decade growth stock. Eventually, though, some combination of the company running out of new ideas and the huge size of the existing company ushered the firm into maturity.

Apple (AAPL) was a near-death experience when the company rehired Steve Jobs and took a big gamble on the iPod. Then came the iPhone and tablets, and the Apple store, with its emphasis on high-end consumers. Then came Tim Cook’s emphasis on manufacturing and distribution efficiency, and the reinvention of the AOL-style walled garden–requiring merchants to pay for access to Apple customers. Again, a company stringing together multiple successive five-year growth ideas.

CSCO, on the other hand, was the king of computer networking, but, like most growth companies, was unable to stave off maturity in the way that WMT and APPL have been.

So,

… the fundamental question the Unhedged article is pointing to is: can NVDA be another AAPL, or is it a CSCO, whose run of new ideas, however epic, is now coming to a close.