E7: NVIDIA AI BUBBLE - We Can't Stay Quiet Any Longer
Summary
TLDRThe video script features an insightful discussion between Larry Tentarelli and Alex, examining whether the current market conditions constitute an AI bubble akin to the dot-com bubble of 2000. Larry, a seasoned investor with firsthand experience during the dot-com era, meticulously analyzes various data points, including stock price movements, valuations, IPO activity, and profitability. Through comprehensive comparisons and historical context, he presents a compelling argument that the current market dynamics, driven by AI and technological advancements, do not mirror the speculative frenzy of the past. Instead, he highlights the robust fundamentals, defensible technology, and high-quality earnings underpinning companies like NVIDIA, suggesting a sustainable trajectory rather than a fleeting bubble.
Takeaways
- đŦ The current tech market conditions are being compared to the dot-com bubble of 2000, but the data shows significant differences that suggest it is not a true bubble scenario.
- đĻ The NASDAQ 100 index has only risen 3x in the past 5 years, compared to a 12x rise during the dot-com bubble, indicating a much slower and more sustainable growth.
- đ¸ The current NASDAQ P/E ratio is 42, which is only a quarter of the 175 P/E ratio during the dot-com bubble peak, suggesting more reasonable valuations today.
- đĻ There were 20+ stocks that rose over 900% during the dot-com bubble, while today's top performers like NVIDIA have seen much slower growth in comparison.
- đ° The IPO frenzy during the dot-com bubble was unprecedented, with an average 70% first-day return and 165 IPOs doubling on their first day, which is not being observed in today's market.
- đĢ NVIDIA's earnings and revenue growth have outpaced its stock price growth, indicating that its valuation is supported by strong fundamentals rather than speculative mania.
- đ¤ The customer base for tech companies today, such as NVIDIA, consists of well-established, cash-rich companies, unlike the dot-com era when many customers were undercapitalized startups.
- đ´ The top 10 companies in the NASDAQ 100 today have 12x higher revenues than the top 10 companies during the dot-com bubble peak, reflecting the maturity and profitability of today's tech giants.
- đĩ Profitability and cash flow generation are a major focus for today's tech leaders, in contrast with the dot-com era's emphasis on potential and unfulfilled promises.
- đĨ While market corrections are always possible, the data suggests that the current tech market conditions are fundamentally different from the speculative dot-com bubble environment of 2000.
Q & A
What is the main topic being discussed in the video?
-The main topic being discussed is whether the current AI and tech stock market rally can be considered a bubble similar to the dotcom bubble of the early 2000s.
Who is the guest being interviewed, and what qualifies him to speak on this topic?
-The guest being interviewed is Larry Tentarelli, who has over 25 years of experience in the financial markets, including working as a licensed broker at Merrill Lynch during the dotcom bubble. He has extensively researched and analyzed the current market conditions and historical data to compare the two market environments.
What are some key differences between the current AI stock rally and the dotcom bubble that the guest highlights?
-Some key differences highlighted include: 1) The magnitude of the NASDAQ 100 index gains (12x during dotcom vs. 3x now), 2) Valuations (NASDAQ P/E of 175 then vs. 42 now), 3) Number of parabolic stocks (20+ then vs. very few now), 4) IPO activity (over 440 IPOs in 1999 with massive first-day pops vs. much lower IPO activity now), and 5) Profitability of leading companies (many unprofitable then vs. highly profitable now).
How does the guest compare Nvidia's performance and financials to Cisco's during the dotcom bubble?
-The guest compares Nvidia's net income of $29.7 billion in fiscal 2024 to Cisco's best year of $2.6 billion net income in fiscal 2000. He also notes that if Nvidia traded at Cisco's peak P/E ratio of 196, it would have a market cap of $5.8 trillion, about twice as big as Microsoft currently.
What is the significance of the quality of customers for companies like Nvidia compared to during the dotcom bubble?
-During the dotcom bubble, many of the customers for companies like Cisco were unprofitable, venture capital-backed startups that eventually went out of business. In contrast, Nvidia's customers today are financially stable, major tech companies like Meta, Tesla, and Google, who are unlikely to go out of business anytime soon.
How does the guest respond to concerns that the current AI stock rally is a bubble?
-The guest acknowledges that stocks can go down at any time, but based on his analysis of historical data and current market conditions, he does not see any evidence that the current AI stock rally meets the criteria of a bubble comparable to the dotcom bubble of 2000.
What lessons did the guest learn from his experience during the dotcom bubble?
-One key lesson the guest learned was the importance of using technical analysis and strict risk management techniques, such as selling stocks when they break below the 200-day moving average, to avoid significant losses during market downturns.
What role does the quality of earnings play in the guest's analysis?
-The guest emphasizes the high quality of earnings for leading AI and tech companies today, with many generating significant cash flow and even paying dividends, in contrast to the mostly unprofitable dotcom companies of the early 2000s.
How does the guest respond to concerns about high valuations for companies like Nvidia?
-The guest notes that while Nvidia's stock has risen significantly, its earnings growth has outpaced its stock price gains, resulting in a lower P/E ratio compared to the start of its current rally. This is in contrast to the dotcom bubble, where stock prices rose much faster than earnings.
What is the guest's overall conclusion about the current AI stock market environment?
-The guest's overall conclusion is that, based on his extensive analysis and first-hand experience, the current AI stock market rally does not exhibit the characteristics of a bubble comparable to the dotcom bubble of the early 2000s, and he expects the rally to continue for longer than most people anticipate.
Outlines
🗣️ Introduction and Background
The speaker, Alex, introduces his friend Larry Tentarelli to discuss whether we are currently in an AI bubble, similar to the dot-com bubble in the late 1990s. Larry shares his background as a licensed broker at Merrill Lynch from 1998 to 2003, experiencing the dot-com bubble firsthand. He explains how he decided to study what happened and develop a technical trading process to avoid similar mistakes.
📈 NASDAQ 100 Performance Comparison
Larry compares the NASDAQ 100 performance between the dot-com bubble period (1995-2000) and the current AI bubble period (2018-2024). He highlights that the NASDAQ 100 went up 12x during the dot-com bubble but has only gone up 3x in the current period, suggesting a much smaller move. He also notes that the current NASDAQ 100 level is only 8% above the 2021 highs, which doesn't indicate a bubble.
💰 Parabolic Stock Movements
Larry discusses the parabolic stock movements witnessed during the dot-com bubble, with stocks like Qualcomm rising 2,619% in 1999 alone and 20 tech stocks rising by 900% or more. He contrasts this with the current market, where only a few stocks, mostly biotechs, have seen such massive gains, and the top performers like Nvidia don't come close to the dot-com bubble levels.
🚀 IPO Frenzy Comparison
The discussion turns to the IPO frenzy during the dot-com bubble, where the average first-day return for internet IPOs was 266% in 1999, compared to 59% for non-internet IPOs. Larry shares examples of IPOs that doubled or more on their first day, with the top 10 averaging a 500% first-day return. He contrasts this with the current market, where he couldn't find any IPOs that doubled on the first day in 2023.
🤯 Speculative Frenzy and Valuations
Larry discusses the speculative frenzy during the dot-com bubble, citing examples of companies like Corvis, which raised $1 billion in an IPO but had no sales and a $27.6 billion market cap. He compares this to the current market, where he doesn't see anything close to that level of speculation or unrealistic valuations.
🆚 Nvidia vs. Cisco Comparison
Larry compares Nvidia's performance and profitability with Cisco during the dot-com bubble peak. He highlights that Nvidia made $29.7 billion in net income last year, 11 times more than Cisco's best year in 2000. Furthermore, Nvidia made more money in 20 days last quarter than Cisco did in their entire best year, suggesting a significant difference in profitability and performance.
💹 Earnings Growth and Valuations
The discussion focuses on Nvidia's earnings growth and valuations. Larry points out that Nvidia's stock price has not risen as fast as its earnings growth, with earnings per share up 764% in the past year while the stock is up only 230%. He argues that this is the opposite of what would be expected in a real bubble, where stock prices would rise faster than earnings growth.
🏦 Revenue and Earnings Comparison
Larry compares the revenues and earnings of the top 10 NASDAQ 100 companies during the dot-com bubble peak in March 2000 with the current top 10. He highlights that the current top 10 companies have total revenues of $1.8 trillion, 12 times greater than the $148 billion total in 2000, while the NASDAQ 100 price is only up 3.7 times. This disparity suggests that the current market is not overvalued compared to the dot-com bubble.
🧑💼 Customer Quality and Financial Stability
An important distinction between the dot-com bubble and the current market is the quality of customers and their financial stability. During the dot-com bubble, companies like Cisco and Sun Microsystems sold to startups with limited capital, which eventually went out of business. Today, Nvidia's customers are financially stable companies like Meta, Tesla, and Amazon, reducing the risk of customer insolvency.
🔍 Personal Experiences and Lessons Learned
Larry shares his personal experiences during the dot-com bubble, including the emotional and financial toll of trading volatile stocks on margin. He discusses the lessons learned, such as implementing a technical trading process and selling stocks when they close below the 200-day moving average to protect capital. He emphasizes the importance of managing emotions and following a disciplined approach.
📊 Data and Research Process
Larry highlights the importance of conducting thorough research and relying on primary sources for data. He explains that his team pulled annual reports and financial statements directly from company websites to compile the numbers used in their analysis, ensuring accurate and reliable information.
🎬 Closing Thoughts and Summary
In closing, Larry summarizes the key points discussed, including the differences in market performance, valuations, IPO activity, earnings growth, and customer quality between the dot-com bubble and the current market. He emphasizes that while stocks can go down at any time, the data and analysis do not support the notion that the current market is in a bubble comparable to the dot-com era.
Mindmap
Keywords
💡Tech Bubble
💡Valuations
💡Parabolic Stocks
💡IPO Frenzy
💡Profitability
💡Earnings Growth
💡Market Capitalization
💡Customer Base
💡Technological Moat
💡Generative AI
Highlights
Larry shares his experience as a broker during the dot-com bubble, living through the massive run-up and meltdown of tech stocks.
Larry discovered technical trading and developed a process using moving averages to manage risk and avoid getting caught in bubbles.
During the dot-com bubble, there were 20 stocks that went up 900% or more in a single year, compared to only 2 stocks today.
In 1999, there were 117 IPOs that doubled on their first day of trading, whereas Larry couldn't find a single one in 2023.
A fiber optics company called Corvis achieved a $27.6 billion market cap with no sales, highlighting the extreme speculation during the dot-com bubble.
Nvidia's net income in fiscal year 2024 was $29.7 billion, 11 times more than Cisco's best year in fiscal 2000 ($2.6 billion).
If Nvidia traded at Cisco's peak PE ratio of 196, Nvidia would have a $5.8 trillion market cap, nearly twice as big as Microsoft.
Nvidia's earnings per share grew 764% in the past 12 months, far outpacing its stock price increase of 230%.
The top 10 NASDAQ stocks today have 12 times higher revenue ($1.8 trillion) than the top 10 in 2000 ($148 billion), but the index price is only up 3.7x.
Unlike the dot-com era, today's leading companies like Microsoft, Apple, and Meta are highly profitable and stable customers for Nvidia's GPUs.
Entire countries and tech giants like Apple are committing to building AI infrastructure, providing a massive market for Nvidia.
Larry emphasizes the importance of analyzing data directly from company sources, as his team did by pulling financial reports from corporate websites.
Larry highlights the key differences between today's market and the dot-com bubble, including valuations, stock price moves, IPO activity, and customer quality.
While not saying stocks can't go down, Larry argues the data shows the current market does not resemble the speculative frenzy of the dot-com bubble.
Larry advises staying open-minded but relying on objective data and analysis rather than emotional reactions when assessing potential bubbles.
Transcripts
so no matter where we turn everybody
seems to think that we are in aom style
Tech bubble I think that this is a
bubble and I don't use that term lightly
we're now you know deeply into into
bubble territory we are living through
just a massive AI bubble So eventually
that suggests that there's going to be a
reckoning so what I decided to do for
this special episode of funding awesome
is bring in my good friend Larry
tentarelli and talk about whether we are
or are not really in an AI bubble the
stock market your time is valuable so
let's dive right into it Larry I think
the first question everyone is going to
have is what the heck qualifies you to
tell us if we're in a bubble right now
sure Hello Alex thank you for having me
on I started in the market in
1998 so I'm going on year number 26 now
I was a series 7 licens broker with
maril Lynch
1998 to 2003 so I actively traded right
through through the run up and then the
run down in the NASDAQ 100 back then so
I lived through the do bubble on a
professional basis and on a daily basis
I made a lot of money I lost a lot of
money but what I decided to do after the
NASDAQ melted down in
2201 I decided to really study what
happened and commit myself to be sure
that that didn't happen to me again
about last May is when I really started
to see the the bubble talk start to show
up on Twitter there was already talk it
was an AI bubble it was a tech bubble
I'd say about 90% of the posts that I
saw were very bearish I've got a
subscription-based website it's a
research website called bluechip
daily.com our subscribers include hedge
fund managers portfolio managers
research analysts Financial uh
journalist and Retail investors some of
our commentary has been featured on CNBC
Barons Bloomberg Reuters and a few other
sources I've been posting for 11 years
since January 2013 and and we've been
fortunate I've developed a follower base
of over 90,000 people and I said to
people I don't think that this is a
bubble whatsoever and I think that this
is going to continue a lot longer than
most people think and now here we are 10
months later and I think the same thing
I don't see a bubble whatsoever based on
my prior experience living through the
dotc bubble we did the research and
compiled the hard data and we're going
to compare all of the numbers from that
bubble in March 2000 versus all of the
numbers today and I think that when your
viewers get done with this video they'll
probably come to the same same
conclusion that there there's nothing
today that looks anything like the
bubble in 2000 so we have somebody who's
not only lived through it but invested
through it on the way up and way down
professionally who's seen all the
emotions tied up with the bubble of 2000
and who's pulled all the cold hard data
and compared it then versus now this
Nvidia Le AI bubble to see if there
really is a pattern here I'm super
excited for it let's dive right into it
here's what I see we're going to talk
about six reasons why we are not in a
tech bubble so first thing NASDAQ 100
1995 to 2000 over a fiveyear period it
went up
12x whoa yeah and we're wait till you
see these charts NASDAQ 100 this 5year
period 2018 to 2024 we're up 3x so 3x is
a good return but it's definitely not
12x number two valuations the NASDAQ
Composite PE in March 2000 was
175 the current NASDAQ PE today is 42 so
if we just look at valuations the
valuation today for the NASDAQ is 76%
lower than it was in 2000 we're going to
talk about some parabolic stocks we're
going to look at IPO activity and then
the big comparison that that I've heard
for over a year now is a lot of people
like to compare Nvidia to Cisco and they
say that you know Nvidia today is Cisco
back in 2000 nowhere near close we're
going to go through the math and then
we're going to talk about profitability
so I want to get started with these
charts I said that not only do I think
that this is not a bubble I said but I
think that this is probably going to go
on much longer than most people think
because these Cycles generally don't end
after a few months it's one thing to
have an opinion
but the numbers really tell the story so
this is a NASDAQ 100 chart
1995 to 2000 and if we take a look in
the bottom leftand corner we can see
1995
37996 the so we'll call it 400 for
simple math over five years we went from
400 to the peak
4,816 this was March 10th of 2000
so from 400 to 4,800 that's a
12x
run in five years and three months so
what I wanted to do is let's take a look
at today's NASDAQ 100 let's take the
same fiveyear look back period and see
how do we compare so this is 2018 to
2024 what I want to do just to be fair
is I want to take the very lowest number
that I can find so we can compare the
run so from
5800 to
17962 that's a 3X run now 3x is nice
over five years but keep in mind
95 to
2000 12x run so if huge difference yeah
so if if we were at the same level today
that the bubble Top in 2012 X the NASDAQ
100 would need to trade for 70,000 right
now yeah very different from where it is
today and Alex here's another
interesting thing if if we take a look
at the nasac 100 today so we're just
under
18,000 right now if we look at the peak
in
2021 we can see the the peak in 2021 was
16764 so so we are less than
8% above the highs in 2021 and I just
think it's difficult to call something a
bubble when it's only 8%
7% over the prior high does that make
sense that does and it's also important
to understand like how much time has
passed since that prior high for
earnings to catch up to these valuations
right so it took well over a year to
reach a new high and in that time these
companies have been growing they've been
adding more to their bottom line they've
been adding more customers right right
Apple's making more money Microsoft is
making more money all these companies
are are making more money as as the
prices going up on the NASDAQ 100 and if
we go back to that chart for a second
you can see from
[Music]
1999 to 2000 this was maybe 15 months
the NASDAQ 100 just it more than doubled
so if the prior Peak was 2500 you're up
at 4,800 I mean just imagine if if the
NASDAQ 100 today doubled in a 12- month
period that's that's what a bubble feels
like yeah yeah completely different
exactly right exactly right so the the
first Viewpoint 12x versus 3x we're
we're just really not anywhere close as
far as the actual move in the market
market so the second thing I want to
take a look at valuation so we're going
to compare NASDAQ Composite March
2000 versus the same thing NASDAQ
Composite today the NASDAQ Composite PE
in March 2000 was
175 the current NASDAQ PE today is 42 so
once again if we're talking apples to
apples we are
1/4 of the valuation in the NASDAQ
today versus at the top in 2000 so just
to give you an idea if if we were at the
same level the NASDAQ today would need
to be at 64,000 and right now it's at
16,000 the
NASDAQ 100 would need to be at least
four or five times higher than it is
today exactly right four times higher
four times higher than it is today right
and by valuations the PE
we're still another factor of four off
right right so whether we're going by
Price or by Price divided by earnings so
far we are nowhere near the.com bubble
levels of 2000 right yeah big difference
here now here's the the next thing the
next point that I wanted to look at
because everybody I think by now is
familiar with super micro smci it's gone
on a really strong run it's been a very
strong stock but Alex here's what I can
tell you in in 988 99 we had 20 super
micros and I'll tell you what I mean
this is from The New York Times and what
this shows this talks about
1999 Qualcomm Rose
2,619 per so it went
26x just in 1999 and and wait till you
see some of these charts that I'm going
to show you 12 other stocks went up at
least
1,000% and a further seven issues went
up at least 900% so you had 20 stocks
that went up
900% or more in one year that is massive
it's that's nuts are these stocks like
from all over the place or are these
like All Tech like what kind of stock
okay were all Tech and we'll take a look
but they were all Tech they were all
internet related so this is from CNET
and this shows if we look here top tech
stocks for1
1999 Qualcomm
26x broad Vision went,
1400% veras sign I think they might
still be around that that was up almost
1200% arm Holdings I wonder if that's
the same arm it is yeah arm's been
public like several times it's been
public then went private then got
acquired then public again okay yeah I
think it's the same arm yeah so that was
up
1,00% all of these stocks were Tech
related internet related some type of
Doom but keep in mind super micro today
that's the the home run hitter super
micro over the past year would barely
crack this top 10 lineup okay so what
about the other stocks like Nvidia and
every other stock that people are
associating with this so-called AI
bubble so in Nvidia over the past year
nvidia's up about
245 per so it wouldn't even be close to
any of these stocks that's an
interesting fact the comments that I see
a lot are this is an Nvidia Le bubble
and sort of what you're saying is NVIDIA
doesn't even meet the criteria to have
this be called a bubble if we're
comparing it to 2000 right Nvidia really
wouldn't even be a blip on the screen
back then so here here's what I mean by
parabolic stocks this is micro strategy
and this is the same micro strategy
that's still around right now this stock
went
45x in a 12-month period 45x so
400% in a 12-month period correct so if
you put $1,000 into it in the middle of
99 your investment was worth
$45,000 less than a year later that is
insane yeah if you put if you got lucky
and you put 10 grand into it you had
450,000 so we're we're talking about
what super micro going going 10x micro
strategy went 45x
Qualcomm went
4200 in 18 months so if we take a look
in 98 October it was trading at a $150
in change
$65. 39 at the peak so this is a 40
2 100% run your your 1,000 would turn
into 42,000 in 18 months and and Alex
I've got to tell you I was in these
stocks I used to I used to trade these
stocks and every single day just imagine
if you had a stock today that went up
4200 per in an 18month period I can't
imag yeah I'm I'm living in the wrong
time man yeah listen the here's the good
news the good news is that I had some
qualcom on the way up the bad news is I
also had some qualcom on the way down
and I thought it would be a good idea to
buy the dip now keep in mind I just
started in the business I think at the
time I was 29 years old and I didn't
really know anything about anything but
when I got started so I started right
about here everything just went up and
we were conditioned just by the dip just
by the dip because it's going to keep
going up so once things started to go
down we just kept buying the dip and we
bought it all the way down and and it
cost a lot of money which by the way is
still largely the message that most
retail investors get today so I'm glad
you're sharing that because that is
something that I think is really
powerful to hear right and the best way
to get better as an investor is to hear
that and understand that you need to
adjust your own strategy accordingly you
know so I'd love to hear a little bit
maybe for a couple minutes just just
what did you learn since then what are
you doing differently now big big
difference great question so I started
to trade here made a lot of money gave
it all back and and once you blow up
your trading account which is what I did
I had no more money left to trade so
this was back in 2002 so I I took a
break from trading for a couple of
months and then I sat down and and I
wanted to figure out just where it went
wrong because
it wasn't Alex it wasn't just me it
wasn't just the the people that I worked
with it was everyone maril Lynch Janice
had a fund called the Janice 20 fund
they might still have it right now maril
Lynch rolled out a product called the
focus 20 it was a u and it was just
basically 20 tech stocks you know norell
and Cisco and these things lost 8090
cents on the dollar so it wasn't just
new investors it was wasn't just the
retail investor so what I decided to do
I wanted to figure
out what could I do again so that I
would feel safe investing my money again
and not go through the same thing so I I
eventually discovered technical trading
I've got a technical process that I
follow that I've worked on for over the
past 22 years right now that I'm very
proficient with it I use moving averages
quite a bit and the key thing is no
matter how good a stock is if I'm
holding a stock and it closes below the
200 day moving average then I sell the
stock I can always buy it back if it
goes back up I looked at these charts
like Cisco and and JDs unase and Intel
and what I found is if the only thing
that I did was just sell those stocks
when they broke the 200 day moving
average and I didn't buy anything and I
didn't buy them I didn't try to found
the bottom I realized if I did that I
would have probably saved 50% 60% of my
capital and that's that's why I use
right now a 100% technical process sure
no that's that's super interesting yeah
so getting back to you know the dot
bubble versus the AI bubble let's talk
about some of these parabolic stocks
yeah let's take a look at today so we
had a quick one JDS unase Alex this was
just 3818 months I shouldn't even be
bringing this one to the table it only
went up 38 fold but here here's where we
are today so I took this information
from finviz and what I wanted to do to
to be because keep in mind I want to be
100% objective I don't want to cherry
pick I want to just take Apples to
Apples so I went into the screener and I
went for the loow hanging fruit so
there's
2,370 stocks in this fin viz database
over 1 billion market cap so I took
stocks that were $1
billion market cap or higher and I took
the top 20 performers so over the past
12 months here's the top 20 performers
so here's super micro up
1,7% over the trailing 12 months the
only stock that's ahead of that is a
very small biotechnology stock $1.4
billion market cap but keep in mind this
stock is up
2400 over the past year which means when
it started this run it was probably what
a $50
million or a $60 million stock so it was