I Survived the Dot-Com Bubble. The Lessons I Learned From That Time Are Keeping Me Out of These 2 Tech Giants, and Here's Why |

The dot-com boom and subsequent bust became painful lessons in my investing career. At the time, I saw many of my stocks make huge gains, only to lose most (or sometimes all) of their value in the subsequent downturn.

That time is on my mind now when I look at the cyclically adjusted price-to-earnings (CAPE) ratio. It’s currently 41, and the only time it exceeded that level in American stock market history was the dot-com boom.

This does not mean the market is due for a crash tomorrow or even next year, but it suggests it is vulnerable to a meaningful downturn. Thanks to the lessons I learned during that time, I’m going to stay out of two booming stocks. Here’s why.

1. Micron

Micron (MU -5.78%) is America’s leading memory chip company, and having traded since 1984, it was a stock market darling during the dot-com boom. It reached a record high of nearly $97 per share in mid-2000 but had fallen below $7 per share in 2003, a 93% pullback.

Micron’s stock did not return to that 2000 high until 2024, a testament to both its euphoria-driven high and the subsequent struggles over the following 24 years.

The company’s fortunes have dramatically improved because it is one of only three producers of high bandwidth memory (HBM) chips. The industry is in the middle of a data center construction boom, and HBM is a critical component in its operations.

Unfortunately for Micron bulls, memory stocks like Micron are among the most volatile in the semiconductor industry. Because memory is a commoditized product, it has considerable pricing power when demand significantly outstrips supply.

However, when supply catches up with or outpaces demand, pricing power disappears, causing revenue and profits to plummet.

Micron reported 379% annual revenue growth in its latest quarter. Also, the nearly $37.7 billion in net income far outpaced the $3.2 billion it earned in the year-ago quarter. Despite that gain, Micron trades at a modest price-to-earnings (P/E) ratio of 12, and the fear of a subsequent downturn likely explains that discount.

For now, industry forecasts point to further increases in demand. Also, unlike in 2000, Micron has locked customers into long-term contracts, a factor that could mitigate revenue declines and stock sell-offs.

Still, stocks are often set up for a fall just when it appears nothing can go wrong. History suggests a massive sell-off when that dynamic changes, so while Micron stock could keep climbing, investors should not necessarily assume it will.

2. Nvidia

Nvidia (NVDA -1.26%) is another unexpectedly vulnerable company in this situation. Admittedly, it may seem counterintuitive to make such a call, as it is the leading company in the critical artificial intelligence (AI) accelerator market.

This dominance led to 106% year-over-year revenue growth in the latest quarter, and with that, net income of $59.7 billion, which rose 126% over the same period. This is an eye-popping level for a company with a market cap above $5 trillion, the market’s highest.

Historical precedents from the dot-com boom probably do not apply as directly to Nvidia. Nvidia launched its IPO in 1999, the same year it invented the GPU. Since it was primarily a graphics card producer at that time, it was not as central to the dot-com boom as it is to today’s AI-driven bull market.

Instead, the Nvidia of today seems to more closely resemble Cisco during the dot-com boom. Cisco, a company that briefly held the world’s largest market cap in 2000, manufactured the routers and network switches essential to internet build-outs.

Like Nvidia now, Cisco kept the dot-com boom going by offering financing to some of its customers. Unfortunately, many of these customers went bankrupt during the bust, resulting in a then-historic $2.25 billion write-down in 2001.

Moreover, Cisco’s growth slowed as its core products became commoditized. As a result, Cisco stock did not return to its 2000 high until this year, when the current data center boom boosted its revenue growth.

Admittedly, Nvidia today is likely less vulnerable than Cisco was at the peak of the dot-com boom. The stock’s P/E ratio of 26 is far below the peak 241 earnings multiple Cisco reached in early 2000. Additionally, alongside its dominant market share, Nvidia maintains a software moat in the AI accelerator market that will probably discourage some customers from turning to competitors.

AI is probably here to stay, and since an AI bust will more than likely be a growth disruption, I recommend that current shareholders hold the chip stock. However, if the customers it finances start to go bankrupt, prepare for a disruption in Nvidia’s growth story.