Although momentum and valuation were more dramatic in the dot-com era, tech companies share other characteristics.

A graph that contrasts the success of Nvidia Corp. with Cisco Systems during the dot-com boom years appears very concerning.

Maybe for that reason, different iterations of the chart have been circulating on X, the social media site that was once known as Twitter. They have also been seen in Wall Street research reports, such as a recent briefing that MarketWatch saw from Julian Emanuel of Evercore ISI.

The figure, which is reproduced below, shows the split-adjusted share price of Cisco (CSCO, +0.41%) from January 1, 1996, to December 31, 2002. (According to FactSet data, Cisco shares most recently split on March 23, 2000, a few days before their high.) This is contrasted with the NVDA performance of Nvidia, which was -2.85% from January 1, 2020, to the close on Wednesday.

Despite its continued existence, Cisco is known as a cautionary story from the dot-com boom and bust. Between January 1, 1996, and the stock’s peak of more than $80 per share on March 27, 2000, on a split-adjusted basis, its shares increased by more than 20 times. This was due to investors’ wager that the demand for servers and other gear related to the then-nascent internet would rise at an exponential rate.

Based on FactSet statistics, Cisco had a market value of around $560 billion, making it the most valued stock in the S&P 500 SPX at the height of the dot-com bubble.

In contrast, as of Wednesday, the company’s value was only $197 billion.

Earlier this month, Nvidia’s market capitalization reached a height of over $1.8 trillion, momentarily placing it as the third-largest publicly traded business in the United States based on market value. The stock had fallen back into fifth position behind Alphabet Inc. after Tuesday’s selloff. GOOGL, +1.01% GOOG, +1.15% and AMZN, +0.90% of Amazon.com Inc.

Prices now aren’t as high as they were at the height of the dot-com bubble

Even though Nvidia’s current valuation may seem high when compared to the S&P 500, it is far less than the profit multiple that telecom hardware companies, such as Cisco, were able to command during the height of the dot-com bubble.

Just before the business released its most recent earnings report on Wednesday, Nvidia’s price in relation to its projected 2024 earnings was at a ratio of 54. When Cisco’s stock reached its high during the dot-com era in March 2000, it was valued at a multiple of over 150 times anticipated earnings.

Analysts would be hard pressed to claim that values now have reached frothy levels equal to the dot-com high when looking at the broader S&P 500. Although the price of the index relative to its trailing 12-month earnings appears historically stretched at a multiple of 22, Emanuel notes that this is still a long way from its peak of 28 times during the boom.

This leads us to still another significant distinction between the Nvidia of today and the Cisco of the dot-com era: the latter is significantly more profitable than the former was at its height.

The founder and chief investment officer of Bokeh Capital Partners, Kim Forrest, stated that “Nvidia is probably more profitable than Cisco was at that point.”

The data support this. According to the most recent full-year statistics available from FactSet, Cisco had an average net margin of 17.2% between 1996 and 2000, whereas Nvidia recorded an average of 27.9% over a five-year period through January 2023.

Momentum also isn’t as intense

By Wednesday afternoon, Nvidia’s stock had recovered over 500% from its October 14, 2022 bear market bottom.

Even though that’s a drastic step, particularly for a corporation that size, Cisco still has it beat. The telecom equipment company saw a 700% increase in value between its high in March 2000 and its low point in October 1998.

According to Emanuel’s calculations, Nvidia’s shares would need to increase by more than 20% from their present levels to $862 a share by April 2024 in order for the company to make a comparable advancement.

Of course, something doesn’t have to stop rising just because it is highly appreciated. Emanuel noted that momentum-driven rallies can come to an abrupt halt with little to no notice, noting the recent craze for meme stocks as one example.

Evercore ISI suggests that investors consider increasing their allocation to defensive firms that have outperformed Big Tech, given that the equities’ valuations appear stretched but not absurd.

Concern may be warranted by the concentration risk

Nvidia and its megacap competitors do, however, outperform their dot-com-era counterparts in one area: the tremendous concentration of today’s stock market. Twenty-five percent of the value of the S&P 500 is attributed, according to Emanuel, to the five largest U.S. stocks.

That is far higher than the previous high from the dot-com era, when the top five stocks’ share of the S&P 500 momentarily exceeded 15%.

“Concentration risk is elevated, far beyond the peaks in Y2K,” Emanuel said.

“Picks and shovels” is what Nvidia and Cisco do have in common.

An old investing myth that dates back to the California gold rush of the mid-19th century is the basis for the many analogies made between Cisco and Nvidia.

According to Steve Sosnick, chief market analyst at Interactive Brokers and a former Wall Street equities trader, “the rationale was always, ‘When there is a gold rush, it’s more profitable to supply the picks and shovels to the miners than to mine the actual gold.”

As a result, Nvidia and Cisco have both earned the moniker “picks and shovels.” While Nvidia produces chips that are necessary for data centers to run the generative artificial intelligence technology that OpenAI and its rivals have pioneered, Cisco is recognized for providing hardware that was crucial to connecting people to the internet.

However, Forrest pointed out that investors should be aware of a few significant variations in their company strategies. One is that Nvidia outsources the production process to Taiwan Semiconductor production Co. TSM, +0.01%, whereas Cisco designs and manufactures its own products.

Additionally, competitors were able to quickly undercut the market leader by producing their own alternative goods because Cisco’s products were easier to build. With its specialized chips, Nvidia still has an advantage, but rivals are catching up quickly.

“I would bet that others, like Intel and AMD and many others, are going to try to Cisco them,” Forrest said. “But I don’t think it will be as rapid as Cisco.”

More than 20 years have passed since Cisco reached its bubble-era peak, but the stock has yet to reach new highs. Whether or not a similar fate lies in store for Nvidia remains to be seen, but it would certainly disappoint many of the bulls who aggressively bid the shares higher over the past year.

Regarding Cisco, Sosnick remarked, “It has been essentially dead money for 20 years.”

As investors eagerly awaited the company’s earnings after the bell, Nvidia shares fell 2.9% on Wednesday, capping a more than 4% decrease from Tuesday. Cisco shares increased 0.4% to close at $48.48.

However, after hours, Nvidia’s stock was up more than 6%, as the massive chip manufacturer revealed that its quarterly sales had increased by 265% to a record $22.1 billion.

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