Bubbles

On Wednesday afternoon, Nvidia joined the $3 trillion market cap club along with Apple and Microsoft. It may be a temporary membership, but it seems every time Jensen Huang, CEO of Nvidia, makes a speech, the stock goes up. In my 60+ years I have seen many companies which seemed to have only the moon as a limit. History has shown us differently. In this blog post, I will share some research on bubbles I remember and end with comments on Nvidia.

The tulip mania, also known as tulipomania, which occurred in the Netherlands during the 17th century Dutch Golden Age is considered the first recorded instance of an asset bubble. The Rise of the tulip started when they were introduced to Holland (now Netherlands) from the Ottoman Empire in the late 16th century. Their exotic beauty and rarity quickly captured the attention of the wealthy and the growing middle class. A peculiar characteristic of tulips, a virus which caused streaked and variegated coloring, became especially desirable, further inflating their value.

By the 1630s, tulip bulbs were not just seen as beautiful flowers but as potential investments. People began buying and selling tulip bulb contracts, often for future delivery, hoping to profit from rising prices. This speculation drove prices to extraordinary heights. A single tulip bulb at the time could be worth more than a house or several years of an average person’s salary.

And then came the Crash. The bubble couldn’t be sustained. By February 1637, the market for tulip bulb contracts collapsed abruptly. There is a debate about the exact cause of the crash, but factors like a lack of actual tulips to fulfill contracts and a dwindling number of interested buyers likely contributed. Many who had speculated heavily on tulips lost significant amounts of money.

There is a legacy to the story. The tulip mania serves as a historical cautionary tale about the dangers of speculative bubbles in financial markets. It highlights how asset prices can become detached from their intrinsic value and the potential for sudden crashes.

The U.S. stock market is full of stories of meteoric rises and spectacular crashes. The episodes are often referred to as bubbles. Following are ten examples of stocks which once seemed headed for the moon.

1. Pets.com, the Amazon for pet supplies in the late 1990s, went public in February 2000 at $11 per share. By the end of the month, it was trading at $86. Just a year later, the company had filed for bankruptcy.
2. Cisco Systems was a leader in the networking equipment boom of the late 1990s. The stock price soared from $1.50 in 1990 to $82 in 2000. However, the bubble burst, and the stock price fell to $11 by 2002.
3. Worldcom was a major telecommunications company which engaged in accounting fraud. The stock price rose from $3.50 in 1990 to $94 in 1999. After the fraud was revealed, the company filed for bankruptcy in 2002, and the stock price went to zero.
4. Beanie Babies were plush toys made by Ty Inc. in the mid-1990s. They were marketed as collectibles, and their prices soared. However, the bubble burst in 1999, and the value of Beanie Babies plummeted.
5. Netflix revolutionized the way we watch movies and TV shows with its streaming service. The stock price soared from around $1 in 1998 to over $700 in 2021. However, the company faced increased competition and subscriber growth slowed. The stock price fell to below $200. (Netflix has made a strong comeback and is approaching $700 again.)
6. Tesla, under the leadership of Elon Musk, became synonymous with electric vehicles and innovation. The stock price went from around $35 in 2013 to nearly $400 in 2021. However, the company faced challenges with production, new product introductions, and maintaining its growth rate. The stock price has fallen to $175.
7. Sun Microsystems is a great example of a company which got caught up in the dot-com bubble of the late 1990s. Sun was a successful company in the 1980s and 1990s, known for its innovative hardware like SPARC workstations and Solaris operating system. They also developed the widely used Java programming language. Then came the dot-com boom and bubble. Internet-related companies saw their stock prices soar based on future potential rather than current profits. Sun’s stock price rose from around $5 in 1995 to a peak of over $64 in 2000. When the dot-com bubble burst in 2000, many internet-related companies saw their stock prices plummet. The stock price fell dramatically, eventually settling far below its pre-bubble levels. Sun continued to operate after the bubble burst, but they faced increased competition and struggled to adapt to the changing market landscape. In 2009, Oracle acquired Sun for a fraction of its peak valuation.
8. America Online (AOL) was a dominant force in dial-up internet access in the 1990s. AOL’s stock price soared on the promise of a new online world. Merging with Time Warner in 2001, the combined company struggled to adapt to the evolving internet landscape. While AOL still exists as a subsidiary within the larger company, its standalone prominence of the dot-com era has faded.
9. Webvan aimed to be the Amazon of online grocery delivery in the late 1990s. Despite heavy investment and customer acquisition efforts, Webvan struggled with logistical challenges and the high costs of building infrastructure for at-home delivery. The company filed for bankruptcy in 2001, highlighting the difficulty of some dot-com business models to translate into sustainable profits.
10. Excite@Home was another prominent example from the dot-com bubble. The company offered dial-up internet access and content aggregation services. It emerged as a major player in the late 1990s, providing internet access to millions of users and partnering with companies like @Home Network to offer high-speed cable internet access. Investor enthusiasm for internet companies fueled Excite@Home’s stock price, which climbed from around $2 in 1996 to a peak of over $80 in 1999. As the dot-com bubble began to deflate, Excite@Home faced increasing competition and financial strain. Merging with another internet service provider, @Home, in 2000 did little to save the company. Excite@Home filed for bankruptcy in 2001, its stock price plummeting to near zero. The company’s struggles highlighted the challenges of scaling internet service providers with limited differentiation and profitability models heavily reliant on subscriber growth.

These stories serve as a reminder of the dangers of bubbles and the importance of considering both potential and reality when making investment decisions.  These are just a few examples of stocks that were once thought to be unstoppable. There are many other examples throughout history.

Several factors can cause stock market bubbles to burst, including rising interest rates, loss of confidence, and excessive speculation. Speculation can drive stock prices to unsustainable levels, and when the bubble bursts, prices can fall sharply. No stock is guaranteed to go up forever.

What about Nvidia? Whether Nvidia’s stock price is a bubble is a complex question analysts are debating. An argument for Nvidia being a bubble is the high valuation: Nvidia’s stock price has surged significantly in recent years, leading to a high price-to-earnings (P/E) ratio. This suggests the stock price may be inflated compared to the company’s actual earnings.

A second factor is competition. The chip market is competitive, and Nvidia faces challenges from established players such as Intel, AMD, and emerging rivals. Some major customers may decide to design their own chips like Apple did. Increased competition could put pressure on margins and growth. A broader economic slowdown could dampen demand for Nvidia’s products.

On the other hand, Nvidia has a strong track record of innovation and revenue growth. The company is a leader in the growing field of AI and graphics processing units (GPUs) which are also in high demand. The market for AI and GPUs is vast and continues to expand, providing Nvidia with significant growth potential. Ultimately, whether Nvidia’s stock is a bubble depends on the market’s investment horizon and risk tolerance.

Note 1: The image of tulips was generated by an AI in WordPress.

Note 2: I use Gemini AI and other AI chatbots as my research assistants. AI can boost productivity for anyone who creates content. Sometimes I get incorrect data from AI, and when something looks suspicious, I dig deeper. Sometimes the data varies by sources where AI finds it. I take responsibility for my posts and if anyone spots an error, I will appreciate knowing it, and will correct it.