Is it still worth investing in Nvidia?

A question we hear very often: Is it still worth investing in Nvidia? The hype around artificial intelligence is unbroken, and so far, the company has always been able to exceed the (high) expectations of investors. How long this can continue is not even answerable with a crystal ball. Even if it does continue, it does not necessarily mean that a superstar stock must be a success. Why not? A look at a superstar from the dot-com era: Cisco, suffices.

Cisco experienced a very similar price increase to Nvidia recently. Cisco’s price peaked at the end of March 2000 with a P/E ratio (price-earnings ratio) of 395 (the P/E ratio of the S&P 500 was around 30 at that time). At that time, the earnings per share (EPS) was USD 0.53. The EPS grew to USD 3.22 by 2024, or by 505% or 7.7% per year. The EPS growth was even faster than the revenue growth per share, which rose from USD 2.74 to USD 13.65, or 398% or 6.84% per year (in USD).

All-Time Highs on the Way to Disillusionment

The chart shows the time-delayed indexed total return of Cisco and Nvidia (source: Bloomberg). The illustration begins on March 29, 1995 – five years before reaching the all-time high of Cisco’s stock price on March 27, 2000. After that, the company went steeply downhill – largely due to excessively high growth expectations. But what about the current development of the U.S. chip manufacturer Nvidia? If you overlay Nvidia’s total return development with that of Cisco – again starting five years before Nvidia’s current all-time high – and voilà, certain parallels inevitably emerge. The big question mark now is how the development will continue from today. Will Nvidia meet the enormous growth expectations, or will there also be a disillusionment soon?

Note on the chart: Cisco reached an all-time high on March 27, 2000, considering only the stock price development. Including dividends, Cisco reached an all-time high in total return on December 29, 2021 – hence the purple line in 2021 exceeds the all-time high from 2000.

Great is not necessarily great

Let’s take a closer look at Cisco’s development: On March 31, 2000, Cisco was the largest company in the S&P 500, accounting for 4.2% of the index. Despite its ability to increase profit margins and quintuple profits, the total return for shareholders who bought Cisco at the peak price in 2000 was -10.24% or -0.44% p.a. The reason for this is that the P/E ratio collapsed and has recently been consistently below the market average. Currently, Cisco’s P/E ratio is 14.68. For comparison, the S&P 500 achieved a total return (in USD) of 7.53% p.a. over the same period (2000 – 2024).

The lesson from this is that it does not matter how successful a company is in increasing earnings per share. If investors are no longer willing to pay a premium for the company’s earnings (measured by the P/E ratio), the old saying applies: A great company does not necessarily make a great investment.

 This information provides a market overview. It does not include any direct or indirect recommendation for the purchase or sale of securities or an investment strategy. When investing in securities, price fluctuations due to market changes are always possible. Despite careful research and data collection, no liability or guarantee can be assumed for the accuracy of the data.