What Nvidia investors can learn from the roaring 1920s and the radio bubble

By Therese Poletti

A tale to two booming stocks, both driven by rapidly developing technology

Rambunctious but talented actress Clara Bow was deemed Hollywood's "It Girl" of the 1920s, but on Wall Street at that time, one company could have been called the "it" stock - RCA, synonymous with the emerging radio industry, just as Nvidia Corp. has become the "it" stock for AI.

The early years of the radio industry had similarities with the AI rush of today: forecasts of "phenomenal" growth; congressional hearings on regulation and allegations of anticompetitive behavior; and a seemingly unbridled technology.

Nvidia's rise in the past two years shares some similarities with RCA's in the bull run of late 1920s, representing an emerging hot technology, but one that also faced many questions.

Some investors have also compared Nvidia Corp.'s (NVDA) roaring and recently volatile stock to networking giant Cisco Systems Inc. (CSCO) during the dot-com boom and eventual bust, especially after last month's big decline.

"Bubbles always have narratives," said Brent Goldfarb, the dean's professor of entrepreneurship at the University of Maryland's Robert Smith School of Business. "There is always a really strong storyline around them that makes you seem foolish if you don't believe it. Everyone around you believes it, so it's hard to be the naysayer."

Two booms, a century apart

The narrative that has unfolded around artificial intelligence is similar to the evolution of radio. Initially, there was a boom in selling the hardware and equipment to run communications and broadcasting. But where revenue and profits would come from in broadcasting was initially unclear.

Nvidia has become the signature company making the first big money from the current AI boom, as companies and service providers load up on its graphics processor units (GPUs) and servers to run AI in their data centers. Like Nvidia, Radio Corporation of America (RCA) was one of the earliest entities to benefit from commercializing a new technology.

The company known as RCA was formed in 1919 out of Marconi Wireless of America to develop a global system for radio communications, initially to run foreign radio stations in the U.S. that the government had seized during World War I.

RCA developed tools for transmitting and receiving the new medium, including vacuum tubes, and introduced the first radio sets for the home. RCA was the leader in a fast-growing and competitive market, which also saw the formation of smaller companies in other aspects of the radio market, from radio-set rivals to broadcasters to smaller companies selling accessories or services to repair the new devices.

But the ensuing consumer mania for radio led to manufacturing overproduction and a glut of radio sets on the market. In addition, some predicted listening to concerts or music on the radio would take the place of attending in-person events and would put musicians out of work, similar to the issues of AI taking some jobs or tasks from human workers.

It was the first radio company listed on the New York Stock Exchange, moving from the New York Curb Exchange, the venue for more speculative stocks. In mid-1925, a year after its stock had moved to the Big Board, RCA reported its first loss, amid reports of production outstripping demand and lower prices.

A soaring stock amid a roaring bull market

By 1928, when the bull market began in full force, RCA was one of the hottest stocks. Its financials were improving, and AT&T had exited radio broadcasting, selling RCA its two stations in 1926. In the book "The Day the Bubble Burst," authors Gordon Thomas and Max Morgan-Witts note that many traders linked the start of the bull market to 1928 after RCA's shares soared 40 points from March 12-13.

That same year, RCA reported a 54% jump in gross operating income, to $100.5 million. Over the span of that year, RCA shares jumped nearly 400%, from a low of $85 to $420, according to "The Day the Bubble Burst." As the boom continued into 1929, RCA issued a 5-for-1 stock split, just months before the October crash.

In the spring of 1928, the young radio business was not even a decade old. Just as Nvidia CEO Jensen Huang has spoken at many schools in the past two years, RCA's David Sarnoff also spoke to students. Then an RCA vice president, Sarnoff told second-year Harvard Business School students that no other industry showed "greater promise of still further industrial expansion" with "phenomenal proportions" of growth than radio.

Sarnoff could also have been a tech CEO talking today about AI and its undiscovered potential and problems. "We know little of the laws that govern radio transmission," he told the Harvard B-school class, according to a New York Times report in April 1928. "We have only an inkling of what the next day may bring forth from the laboratory."

Nvidia, founded in 1993, is today a much older company than RCA was at the time of the big radio boom. Its huge financial gains from AI are a culmination of over a decade of research and development in high-performance computing. In contrast, RCA was built on the patents and assets of Marconi Wireless, partially owned at the time by GE (GE), AT&T (T), Westinghouse and United Fruit.

Like RCA, Nvidia issued a stock split - at 10-for-1 after its shares soared 151% this year, and 239% in 2023. Its revenues have hit new records each quarter, surging past expectations. Nvidia's valuation has skyrocketed, making it one of the most valuable companies in the world, and added $1.8 trillion in market capitalization this year alone.

What's the business model?

RCA's path had more bumps in the road. In addition to periods of inventory gluts of radios, the nascent radio industry was trying to figure out how money would be made from broadcasting, just as many wonder what will be AI's real business model.

"When the bubble started warming up, it was unclear how money would be made in the ecosystem," said Goldfarb, who is also a co-author with fellow University of Maryland associate professor David Kirsch of the book "Bubbles and Crashes: The Boom and Bust of Technological Innovation," published by Stanford University Press. "Radio had a problem of how it was going to charge for broadcast." Advertising and government tax, much as the BBC is funded, would eventually win out, but it was not immediately clear.

"AI has a problem in that it's unclear where the value is," Goldfarb added. "It seems valuable, but who will pay for what? And how should that payment be structured?" In a recent survey by market-research firm Gartner Inc., 49% of respondents said the primary obstacle to AI adoption is the difficulty in estimating and demonstrating the value of AI projects.

"Bubbles and Crashes" co-author Kirsch said in the early days, advertising was not initially seen by some radio executives as a viable solution to generate revenue. "What consumer would be willing to be barked at by advertisers in their sitting room?" he said, adding that the industry was so at odds, a radio trade publication in the early 1920s held a contest with a cash prize for the best idea to pay for broadcasting.

One of the biggest differences, though, between the rise of RCA and Nvidia, was the element of market manipulation that existed in the 1920s. In the era before the Securities and Exchange Commission was formed in 1934, there were perfectly legal syndicates of investors who colluded to buy stocks like RCA, leaking positive stories to the press and driving up the prices.

Organized by Michael Meehan, the NYSE specialist in RCA, the pool of investors who bought RCA included James Riordan, a New York banker who committed suicide in 1929, his finances in ruins after the crash.

Meehan was later banned from trading in the mid-1930s, caught in a different scheme under the new securities regulations, for manipulating the price of Bellanca Aircraft, the first punitive action by the new SEC.

Surviving the crash

In the speculative frenzy and the market crash of 1929, RCA's shares plunged from a high of 114-3/4 to a low of 26, according to the New York Times.

But the crash did not kill the company. RCA soldiered on, and in the 1930s, radio became an even more important communications medium, when President Franklin Delano Roosevelt's fireside chats kept Americans informed during the Great Depression and the prelude to World War II.

RCA's purchase of AT&T's broadcasting assets formed the basis for the National Broadcasting Company (NBC), which took over RCA in 1930. The company also was persuaded to be the main tenant in a new skyscraper in midtown Manhattan. Upon its completion in 1933, the building today known as 30 Rockefeller Plaza was initially the RCA Building. The company stayed independent until 1986, when it was acquired by GE. Throughout its 67-year history RCA ventured into other compatible businesses, including phonographs, motion pictures, television and computers.

Most strong companies survive bubbles and busts. Cisco survived the dot-com bust. Today the 40-year old company, while not the growth engine it once was, is starting to sell networking gear for AI. In the current AI boom, there will also be big winners and losers, and Nvidia's foothold in the AI data center will likely remain dominant, even when its current fantastic revenue and profit growth starts to slow. The question is, when will companies stop building out data centers? Or will a shortage of power become the restraining factor? Nvidia also has its videogame and automotive businesses to fall back on if data-center sales slow.

"The trick is that we are in the middle of it now and we don't know how it is going to play out," Goldfarb said. "One can come up with a story that justifies the current valuation, but no one can actually predict the future."

-Therese Poletti

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