Why NVDA Will Be a Short

At the end of February, we published a note on NVIDIA Corporation (NASDAQ: NVDA) cautioning investors to DO NOTHING with the stock.

Wow – we were wrong, right?

At the time, the stock was around $80 per share (split-adjusted), and within a few months (June), it would hit a high of over $140.

If you were a fan of NVDA and followed our advice, you missed a nice money-making opportunity.

We were wrong.

Our calls on stocks, though, are always about probability. Our view then was that the chance that you would make a lot of money soon was low. That view was wrong.

The note we wrote about NVDA at the time, though, was not focused on the short term. It focused on what we think will EVENTUALLY happen.

We have been active participants in the stock market for three decades, and I became a full-time portfolio manager back in 1997. JUST in time to see the “Dot-com” bubble.

While this time is not the same, we are seeing many similarities with the current enthusiasm about artificial intelligence, or "AI.”

What is most interesting to us is not the similarities in stock price movements but the company fundamentals.

In honor of “NVDA Day” today, we are republishing that note along with our recollections from that period.

We don't know what NVDA will report today. They will most likely report another great quarter, and it will (again) soar to new highs.

We think it is an excellent company riding a substantial fundamental wave of demand that will continue for decades, JUST like the Internet twenty-five years ago.

That said, we think it is important that investors know their history because NVDA's growth will eventually slow (and even go negative), and you will need to be prepared.

Here is what we wrote…

We were thinking about what is going on with NVDA and similar situations we have seen in our careers.

As we were doing so, we saw a great note from our old friend Dan Ferris at Stansberry Research. He mentioned 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 rollout, selling radios and parts to enthusiasts.

As Dan retells it, the first radio station started broadcasting in November 1920, and by 1929, there were nearly 700 stations across the country. Sales of radio equipment went from $60 million a year in 1922 to $842 million in 1929.

Just about any stock with the word “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 is going to do what RCA did but rather to point out that there are always significant trends that will change the world and a company that is leading 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 often forget that the primary catalyst for the boom was the literal physical buildout of the Internet.

Much like in the radio era, the demand for equipment to build the backbone of the Internet was absolutely 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…

When revenue grows like that, the stock price is likely to rise. Here is the stock chart from back then…

The stock peaked on March 27, 2000, at more than $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. It shows the revenue growth from 1993 through the present day…

We spoke about the huge 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 a three-year period.

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 made the "must have" networking equipment as every telecommunications company on Earth scrambled to build 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. They built out much MORE than was initially required and didn't need to buy much 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 with attractive pricing. The product wasn't as good, but it was a lot cheaper, more available, and "good enough.”

THIS is what we think eventually happens to NVDA also.

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

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

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

The article discussed how NVDA's AI chips were selling in the secondary market for 2x or 3x their cost from the company itself. These chips were not cheap 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.

We think NVDA is a great company in a great position, but EVENTUALLY, this is going to end badly.

BE PREPARED.