...exactly what I had said in past numerous posts.
...stocks front-run their potential, so being profitable won't be enough to ensure the stock stays high and moving higher...once growth stalls or retreat from lofty expectations, they will mean revert from their very elevated valuations.
...it happened to internet stocks, solar stocks, EV/lithium stocks and it will happen to Mag7 and AI stocks as well.
...think about it, Amazon has to fall -34% to get back to Oct 2023 lows. And even at that level (Oct 2023) it will still be about 38% above its Covid crash lows of 2020. At the end of 2020, it was making $24B in profits, at the end of last year it was making $37B, a -35% drop in profits would take its financials back to end of 2020. A -34% drop in the stock price for a mega tech would be enough to see a huge drop in the S&P500.
Don't Get Left Behind When the AI Bubble Bursts
By Porter Stansberry
Cisco Systems (CSCO) became arguably the most important company of the 1990s Internet revolution...
It was (and remains) the leading provider of networking hardware – routers and switches – that formed the physical backbone of the burgeoning Internet.
The company ended up connecting lovers... and computers... and computer lovers, all around the world.
Following its initial public offering in 1990, the stock averaged an impressive 100% annualized return over the next 10 years.
By March 2000, CSCO shares had soared above $80 per share, making it the most valuable company in the world... Its market cap reached $570 billion – briefly surpassing the reigning leader, Microsoft (MSFT)... And analysts began to predict that Cisco would become the world's first trillion-dollar company.
But Cisco's success was short-lived...
As it turned out, CSCO peaked that same month in March 2000 at $82 per share and plummeted as the dot-com bubble deflated. Shares bottomed nearly three years later at around $8, for a peak-to-trough decline of 90%.
Today, more than 24 years later, they still haven't returned to that dot-com record price. Take a look...
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Cisco's dismal performance wasn't caused by a dramatic reversal in its business. The only trigger was that the company's revenue growth slowed from the strong 50%-plus average rate of the late 1990s to the high-single-digit average rate of the following decades.
As I'll explain today, an eerily similar scenario is unfolding with AI darling Nvidia (NVDA). It's an almost uncanny mirror image of Cisco in the 1990s. And if folks aren't careful, they could end up in a near-identical situation as Cisco shareholders.
Even Cisco's former CEO, John Chambers, has gone on record protesting that Nvidia is not like Cisco. But the parallels are undeniable.
Nvidia has a chokehold on a vital piece of computing technology. Its powerful graphics processing units ("GPUs") and proprietary CUDA platform are the modern-day equivalent of Cisco's routers and switches.
It has been on an unstoppable growth streak, outperforming virtually every other asset on the planet over the past several years.
And in June, it (temporarily) passed Microsoft to clinch the title of the world's most valuable company, briefly sporting a market capitalization above $3.3 trillion.
Crucially, both companies – Cisco then, Nvidia now – have been riding the cresting wave of a massive, disruptive technological revolution. This boom is much bigger than any individual tech company... and, potentially, subject to an outsize correction.
So the question is... when will the market's honeymoon period end?
The similarities don't end with Nvidia and Cisco. At Porter & Co., we've been tracking the Parallel Processing Revolution...
This revolution will fuel all kinds of incredible new technologies, such as generative computer learning (aka AI), self-driving cars, human-level machine interfaces, and advanced robotics... along with products and services we can't even imagine today.
The problem is, this burgeoning revolution is likely to follow a similar path as the broader 1990s Internet boom. And that means profiting from it won't be easy.
Then, as now, a handful of companies with transformative technologies were poised to change the world and create massive wealth in the process.
But even the most successful companies took longer to deliver on the promise of wealth creation than almost anyone would have imagined in the late 1990s... And any investor who bought in at that time would've suffered through years – or even decades – of disappointing returns.
We already shared the example of Microsoft – whose Windows operating system and Internet Explorer web browser played a pivotal role in the early growth of the World Wide Web.
Yet, even though Microsoft's underlying business grew rapidly throughout the 2000s, its share price went nowhere for nearly 20 years after the initial mania ended. Take a look...
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Of course, Microsoft and Cisco weren't alone. When the Internet bubble burst, dozens of other would-be-dominant Internet companies suffered massive price declines and years of dismal returns.
For example, Amazon (AMZN) shares fell 95% following their dot-com peak and wouldn't make a new all-time high for nearly 10 years.
Countless other popular but less established companies – such as Webvan, Boo.com, Kozmo.com, and Pets.com – went bankrupt and never recovered at all.
We think the peak of today's bubble is still to come... with an inevitable bust.
According to the Wall Street Journal, Nvidia has sold $50 billion of GPUs since the AI boom began. However, the companies actually using those chips in AI applications have only generated $3 billion in revenue to date (to say nothing of actual profits).
This imbalance is unsustainable. Unless the firms using these chips can ramp up revenue significantly, it's likely just a matter of time before the flood of capital into Nvidia's chips begins to dry up.
That would cause Nvidia's remarkable revenue growth and other related companies to slow, and valuations would suddenly appear much higher than they are today.
Notably, this scenario doesn't even include the potential for any economic slowdown.
Given the risks of near-term downside in Nvidia and related stocks, the safest approach for most investors is simply to wait to buy them...
Sooner or later – I suspect within the next 12 months – these stocks will suffer a severe pullback that brings valuations down to levels that will lead to tremendous long-term returns.
That said, given the potential for these stocks to soar even higher before that inevitable drawdown begins, a lot of folks are getting on board or continuing to hold these stocks if they already own them.
If you're among them, we can't overstate this... Use trailing stops to protect yourself. While these names have tremendous upside potential, there's no telling how far they could fall – and how quickly – in a bear market.
Trailing stops will help lock in any existing gains. But more important, they will protect you from suffering a catastrophic loss of 50%... 70%... or 90%... and ensure you have capital on hand for the generational buying opportunities that are likely to follow.
Whether you own these companies or you're waiting for your chance to buy, trailing stops are critical to help you protect your gains.
