Is Nvidia the most important stock?

In the 2000 movie Almost Famous, actress Kate Hudson gleefully proclaimed, “It’s all happening.” She played the part of a groupie who calls herself Penny Lane (after the Beatles’ song of the same name) as she travels with a rock band in the early 1970s. The line suggests that Penny feels something meaningful is taking place in the world, culturally and politically, and that traveling with a rock band makes her a part of it all.

It captures the feeling some folks had in the ’70s that a cultural revolution had taken place in the previous decade, and it was still gaining momentum. I’m not saying I agree with any of this. The point is that, in those three words, Penny Lane sums up the swirl of rock music, purportedly revolutionary politics, and sentiment against the Vietnam War into vague references to a “cultural awakening.”

In the investment world, nothing makes you feel that “it’s all happening,” like stratospheric stock market valuations, the upward spiral of new-era optimism, and companies going public that perfectly capture the ignorance-fueled spirit of the times. We even have the modern-day version of another group of “shoeshine boys” touting “the most important stock on planet Earth.”

A legendary Wall Street story says that just before the stock market crash of 1929, Joe Kennedy realized that if the shoeshine boy was getting into the stock market and offering stock tips, then everybody was already in and maybe it was time to get out. He sold all his stocks and averted losing money in the Black Friday crash.

At the peak of every mega bubble, there’s “THE” stock. Just one. One shining, can’t-miss, no-brainer Company reporting the most incredible financial results as its share price travels endlessly, unstoppably upward. In the 1920s, that stock was Radio Corporation of America (“RCA”). It sold General Electric and Westinghouse radios and parts, mostly to amateur home radio enthusiasts.

The first U.S. radio station started broadcasting in Pittsburgh on November 2, 1920. By 1929, there were nearly 700 radio stations across the country. Sales of radio equipment rose from $60 million in 1922 to $843 million in 1929.

Like “gold” in the 1970s, “dot com” in the 1990s, and “blockchain” in the 2010s, any company that had “radio” in its name in the 1920s soared. One example was Kolster Radio, which sold radios like RCA. It rose from $10 per share to $95 per share from 1927 to 1929, then crashed below $1 per share and filed for bankruptcy in 1930. (Contrary to some rumors, I was not there.)

RCA’s performance was even more dramatic. Its split-adjusted share price rose from about $1.165 in 1921 to $114.75 in September 1929 (the bubble’s peak) before crashing back to $2.63 by May 1932. RCA was a terrible investment, but not because it was a terrible company. It was an important developer of broadcast-television technology, including the advent of color television, and it created both the NBC and ABC radio and television networks. The company was really at the center of a huge new trend, but it was not enough to justify its stock price during the radio bubble. After the 1929 crash, it didn’t exceed its previous all-time high until the 1960s.

From 1999 to 2000, the one “no-brainer” stock was Cisco Systems (CSCO). Cisco makes routers and switches, or “Internet plumbing,” as some would say.  Some people believed that no matter which dot-com companies succeeded or failed, the Internet’s exponential growth would continue for long enough to justify paying as much as 62 times sales and 395 times earnings for Cisco in March 2000.

Cisco’s sales grew from $5.4 million in 1988 to $22.3 billion in 2001 – a 4,000-fold increase. Cisco has continued to grow, with sales reaching $57 billion last year. It has been a profitable, cash-gushing business since the 1990s. But its stock price has yet to exceed its March 2000 high.

Today, of course, that one stock is Nvidia. Goldman Sachs traders recently called the AI-focused semiconductor maker “the most important stock on planet Earth.” Like RCA and Cisco, Nvidia has a real and excellent business. The company invented graphics processing units (“GPUs”) in 1999, sparking a revolution in gaming and other graphics-intensive software. Through various innovations from 2006 to 2018, the company pioneered a new line of hardware designed to power artificial intelligence software.

AI became the next new thing in the stock market in 2023, and Nvidia’s stock rose 240% while outperforming the Nasdaq Composite Index’s blistering 44% rally by more than 200 percentage points. This year, the stock hit an all-time high closing price of $1,158 per share on May 30 and is up 129% in 2024. It trades for roughly 32 times sales and 66 times earnings and has a market cap just shy of $2 trillion.

Nvidia is approaching meme-stock-like price action, up more than 60% since the start of the year. It appears the “shoeshine boys” are back and touting the stock. Some actual boys (and girls) are taking up the cause and touting Nvidia. The Wall Street Journal reported on a recent business conference for high-school students. During breaks between the conference’s competitive events, the room was alive with chatter about Nvidia. They all love AI, and therefore, they love Nvidia – just like everybody else on Earth right now (except you and me, of course). And just like everybody loved radio and RCA in 1929 and the Internet and Cisco in 2000, so goes Nvidia today.

The Journal quoted a 17-year-old investor with more than 25% of his portfolio in Nvidia (via his parents’ account) who seemed really excited by the possibility of Nvidia reaching “meme-stock levels of growth.” I guess he missed the part where the meme stocks all crashed. He looked at the boom fueled by social media site Reddit and then pretended it had a happy ending.

Good for him for having money to invest at 17. I never had any until I was in my 30s. But he’s a teenager loaded up on “the most important stock on planet Earth” at mega-bubble valuations because AI is cool. This is not likely to end well.

Full disclosure: I personally own shares of Nvidia and am going for the ride. But it represents less than 5% of my portfolio. Will Nvidia go the way of RCA and Cisco, or will it be the exception and go the way of Apple or Wal-Mart over the long term? Beats me. I own enough to be very happy if it does and not enough to get hurt if it doesn’t. That’s something for everyone riding this rocket to consider. Thanks for reading.