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Nvidia (NASDAQ:NVDA) stock has been on a sharp move higher in recent years. And even though the company now has a multi-trillion-dollar market cap, it’s up 21% in the past year. That’s impressive, although some believe AI stocks are now in a bubble. Just like Cisco Systems, which soared only to tumble 80% when the dotcom bubble burst in the early 2000’s, could Nvidia now be a stock to stay away from?
Lessons from the past
To give a bit more context, Cisco was one of the defining investments of the dotcom boom. As companies rushed to build out the internet, Cisco supplied the networking equipment required to make it happen. Today, Nvidia occupies a remarkably similar position in AI. Rather than selling the applications everyone hopes will eventually make money, Nvidia sells the picks and shovels required to build them.
Expectations became so extreme during the dotcom bubble that an excellent company like Cisco became a terrible investment at the wrong price. Cisco’s shares subsequently collapsed around 80% from their 2000 peak. It’s a warning Nvidia investors shouldn’t ignore. AI can completely transform the global economy while Nvidia shares can still disappoint if today’s valuation already assumes too much of tomorrow’s success.
Yet even though there are some similarities regarding the general bubble hype and valuation concerns, there are some key differences.
A different era
The main point I’d cite for those worried is that Nvidia’s boom is being backed by extraordinary profits today. Fiscal 2026 revenue surged 65% to $215.9bn, with net income hitting $120.1bn. Then Q1 FY27 revenue jumped another 85% year on year to $81.6bn, including $75.2bn from Data Centre. Gross margins were an almost absurd 75%. These aren’t numbers based on what Nvidia might earn in 10 years but what’s happening right now.
I also don’t buy the valuation argument that much. At the height of dotcom mania, the price-to-earnings (P/E) ratio of technology stocks was off the charts. By comparison, Nvidia has a P/E ratio of 42.09. Sure, it’s higher than the Nasdaq average, but it’s not crazy. This reduces the potential for a sharp share price fall.
Where I do get nervous is the sheer scale of spending required to keep Nvidia’s growth machine running. The company recently partnered with financial backers to mobilise more than $500bn for AI infrastructure. If hyperscalers eventually decide they’re not generating adequate returns on those enormous investments, GPU demand could cool rapidly. This could provide a wake-up call for some investors as the stock could move lower on this reality.
We also can’t forget about competition from custom chips or even export restrictions. Yet despite these risks, I think it’s unlikely we’ll see Nvidia stock mimic Cisco any time soon. However, given the size of the company, I struggle to see the stock offering substantial potential for a big move higher in the coming year. Therefore, I think it’s worth looking elsewhere for better stock picks.
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Jon Smith does not hold any positions in the companies mentioned
This story originally appeared on Motley Fool
