And the Winner Is…

I read an interesting article on Morningstar that compares Cisco and NVIDIA, asking if Cisco’s fall from grace will be repeated by NVIDIA. The simple answer is – Yes, of course it will. The difficult question is when that will happen. Back at the peak of the internet bubble, as we transitioned into the 21^st century, Cisco was deemed by many to be a ‘one decision stock’ – you only bought it. That, of course, was a massive mistake, and the reason is that no advantage lasts forever.

The chart below is a list of the ten most valuable US companies by decade from 1950. Old giants consistently disappear from the list – AT&T, IBM, Sears, Kodak, GE, etc. The company with the most longevity is Exxon, but even now, it has been replaced as the global economy shifts away from oil and gas. Only three years removed from the 2020 list, there are already several changes to the list and the one generating the most interest is NVIDIA, the dominant maker the chips necessary for artificial intelligence applications.

The question Morningstar asks is whether NVIDIA can succeed where Cisco, and even Intel, the last ‘dominant chip maker’ failed? Of course, they can, but history strongly suggests that they are likely to fail. Once companies are entrenched, they are susceptible to ‘better mousetraps’ being developed by others and failures to adapt quickly enough to protect their market position. Indeed, this is the history encased in this chart; a constant evolution of business that creates a steady stream of winners and losers. It is not only the way capitalism works; it is the reason that it works. Failure is a necessary and integral part of the process.

NVIDIA is new to the list and has a technological lead that will be tough to overcome in the short-term, so despite the rocket ship ride this year, NVIDIA may still have room to run and could be on this list for many years to come.

However, on Thursday of this week Advanced Micro Devices, unveiled its most advanced chip yet servicing the artificial intelligence market, and the stock screamed 10% higher for the day! This is just another example that there is never a shortage of competition for the largest and most profitable segments of the economy. If you are at the top, you need to not only be good, but also be lucky, to stay there. The investment lesson is to heed the history lesson. Be careful blindly hopping onboard the biggest, successful companies, assuming that success will continue unabated.

Make no mistake, these are all fine companies and will make many investors more money, but betting big on these companies comes with an ample supply of risk as well. Apple is worth roughly $3 trillion, the sum total everything that company has achieved since inception. If the stock is to double from here, assuming a static P/E multiple, the company will have to do something that duplicates that result. That is no small task. The law of large numbers suggests that these large tech companies will almost have to experience slower growth on their very large revenue bases, even though the companies continue to prosper.

It is with this in mind that PWM is launching a new growth equity portfolio, anchored in emerging technology, where unit and market value growth potential is highest. It is a high risk, high reward strategy and will be available for those clients that are seeking differentiated investments to grow their capital.

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By: thinkhouse