What does a real bubble look like? Try Cisco Systems

Figure 1 shows the Price to Sales Ratio for Cisco Systems. In the 1990s, the company provided Internet infrastructure, just as Nvidia today provides computing infrastructure for artificial intelligence models.

In the 1990s, Cisco was hailed as the King of the Internet. On March 27, 2000, at the peak of its stock price, Cisco was valued at 63 times sales and was then the largest company in the world by market cap, overtaking Microsoft.

Figure 2 shows the Price to Sales ratio for both Cisco and Nvidia. As of February 23, 2024, Price to Sales for Nvidia is 31.9 (however, based on trailing sales). Because the company is rapidly increasing revenues, the actual Price to Sales is only 20 (see Figure 3, blue line).

Nvidia has had 3 big business and valuation expansions in recent years (Figure 3):

1) Since 2016 due to the Bitcoin mining craze (Nvidia's GPUs were really popular for mining Bitcoin and Ethereum),

2) From 2020 due to the pandemic (Nvidia's GPUs supported remote work, gaming and covid-19 research),

3) From November 2023 due to the artificial intelligence boom (Nvidia's GPUs are essential for AI model training).

Do we have a real bubble in Nvidia's valuation? Not necessary, if it is, it's more of a "baby bubble".

Key takeaway: since 2020, the valuation has been stable around 18 times sales - see Figure 4 (Figure 5 shows more details about the company's market capitalization and annualized sales).