Déjà vu All Over Again

Yesterday, we discussed the company and stock of the moment – NVIDIA Corporation (NASDAQ: NVDA) – and what to do with the stock.

Our conclusion – do nothing! Simply, don't be involved.

That is likely to be difficult for many folks. It is hard not to go to the hottest club in town when everyone talks about it, even if it is too crowded and overpriced.

Remember, though, you SHOULD do nothing with 99% of stocks 99% of the time.

We believe the best opportunity in NVDA has likely passed. 

The stock went from $200 billion in market cap to $2 trillion. It will be much more difficult for the company to go from $2 trillion in market cap to $10 trillion in the next year.

There's barely anybody on Earth who doesn't know the story of NVDA now. Expectations are sky-high, and it will be easy to disappoint.

We were thinking about what was happening with NVDA and similar situations we had seen in our careers.

As we were doing so, we saw a great note from our old friend Dan Ferris at Stansberry Research. He brought up a similar situation that neither of us was around for but was as impactful as artificial intelligence – the introduction of radio.

As he says, every "bubble" has that ONE company that is the "it" company for that moment. For radio, it was Radio Corporation of America ("RCA"). This was the "picks and shovels" company of the radio roll-out, selling radios and parts to enthusiasts.

As Dan retells it, the first radio station started broadcasting in November 1920. By 1929, there were nearly 700 stations across the country. Radio equipment sales went from $60 million annually in 1922 to $842 million in 1929.

Just about any stock with "radio" in the name went soaring. Think of what happened with anything with the word "crypto" a few years ago.

RCA was the leader of the pack. It went from a split-adjusted share price of $1.17 in 1921 to $114.75 by 1929. That is a +9700% return! 

Here is a chart we found…

THEN, it crashed down to $2.62 by 1932. It didn't reach that old high again until the 1960s…

This isn't to say that NVDA will do what RCA did, but rather to point out that there are always big trends that will change the world, and sometimes a single company will lead the way. When they go to the moon, though, you need to be careful.

While we weren’t around for the advent of radio and RCA, we were around for what happened during the "dot com" era. Folks need to remember that the primary catalyst for the boom was the literal physical build-out of the internet.

Much like the radio era before, the demand for equipment to build the internet's backbone was booming!

Telecommunications companies (whose stocks were soaring) were buying tons of equipment. 

Many folks recently have been referencing what happened to the stock of Cisco Systems, Inc. (CSCO) back then. 

Dan points out sales grew from $5 million in 1988 to more than $22 billion by 2001. An incredible +4000% increase! That was REAL demand…

You will likely see a strong stock price when you grow revenue like that. Here is the stock chart from back then…

The stock peaked on March 27, 2000, at over $80 per share.

We are guessing you know what happened next, but here is that chart…

Almost 24 years later, the stock STILL has yet to reach those old highs.

We want to share an important chart regarding CSCO. Here is the revenue growth from 1993 through the present day…

We spoke about the massive growth across the 1990s but look at what happened at the end of this period – CSCO revenue went DOWN.

It would continue to move higher and more than double, but it was going in the other direction for three years.

Could this happen to NVDA?

It certainly doesn't feel like it right now, as they are crushing numbers and growing like crazy. We remember those CSCO reports back in 1999, though, and they felt the same.

Back then, CSCO was making the "must have" networking equipment as every telecommunications company on Earth scrambled to build out the internet. These competitive companies would pay virtually anything at the time to get the equipment. In their mind, they couldn't afford to be left out!

Eventually, they got enough equipment to build out what they initially needed. In fact, they built out much MORE than was initially required and only needed to buy a little equipment for a while.

CSCO also built more capacity and was able to satisfy these customers. Unfortunately, they did so right as the customers realized that – in their excitement – they had built more than they needed in the near term.

In the meantime, competitors to CSCO who were way behind either caught up with better products or attractive pricing. The product wasn't as good, but it was cheaper, more available, and "good enough."

THIS is what we think will eventually happen to NVDA.

It will still be a leader. Revenue will still likely grow multi-fold from these levels. It still is an excellent company in a fantastic sector.

The market, though, catches up, especially in equipment like semiconductors.

What is your biggest concern regarding NVDA stock? Let us know in the comment section below.

Want to know the scariest article we have seen about NVDA recently?

The article talked about how NVDA's AI chips were selling in the secondary market for 2x or 3x what they cost from the company itself. These chips were costly to begin with!

This means these chips are so in demand that buyers are willing to pay a premium.

What do we think of when we see THIS kind of demand for manufactured goods like semiconductors? SUPPLY.

NVDA is going to create the supply to satisfy this demand. So will their competitors.

NVDA is an excellent company in a great position. Still, we have seen this story before, and – as we said yesterday – the best thing to do right now is grab a bowl of popcorn and watch. Do nothing.

Check out Enrique Abeyta’s conversation with JC Parets on the HX Podcast.