This highlights the risk of relying on future earnings to justify a stock's price, especially when the outlook is as uncertain as it is for NVIDIA. If the company's consensus growth forecasts prove too optimistic, the stock will be re-priced, with plenty of room for a correction.
Comparisons between Nvidia and Cisco Systems have been made a lot recently, and for good reason: Like the Nvidia chips that power AI today, Cisco made the routers that powered the internet's rapid growth in the 1990s, and the mania for internet stocks briefly made Cisco the most valuable company in the world.
What's most instructive about this comparison is how Cisco investors got it wrong: For 10 years, from 1991 to 2000, Cisco grew its operating profits by 71 percent a year, to $4.6 billion in fiscal 2000 profits, a valuation of 233 times its all-time profits, and confident expectations of continued massive growth that was sure to continue.
But Cisco's fortunes changed swiftly after the Internet bubble burst in 2000. Operating profits fell to just $21 million in fiscal 2001, and by the time they recovered to 2000 levels two years later, Cisco's stock was trading at 39 times its past year's earnings, a fraction of its 2000 valuation. The company's valuation has been declining ever since.
