Friday, September 2, 2022

Cisco Systems (CSCO) : Lessons from the Dot-Com Bubble

In March 2000, Cisco Systems (CSCO) reached an all time high of $82/share. It became the largest company in the world, with a market capitalization of around half a trillion dollars. It was also the largest company in the Nasdaq 100.

Investors were excited about the growth prospects of New Economy companies. As a result, they were willing to overpay massively for their growth prospects.

In the case of Cisco Systems, the company had gone public in 1990. It sold for about 20 - 30 times earnings in 1990. The company then managed to grow earnings per share 150 fold since its IPO in 1990. As a result, the stock had a high total return fueled by that + valuation expansion in 1990s.

Investors possibly expected a high future growth. However, assigning a $450 billion market valuation was a tad optimistic in hindsight. We now know that trees do not grow to the sky.

But it looks like investors in March 2020 did not know this lesson, yet:

Chart Credit to: New Low Observer

In the case of Cisco (CSCO) investors assigned a $450 billion valuation in 2000 on a company that earned $2 Billion in 1999 and $2.7 billion in 2000.

Cisco just reported a net income of $11.8 Billion for 2022.

On a per/share basis, things look like this:

Cisco Systems (CSCO) has managed to grow earnings per share from $0.30 in 1999 to $2.82 in 2022.

The stock has failed to exceed the record levels from the dot-com bubble despite a 7 fold increase in earnings per share since 2000. Investors generated a total return of 29% since the end of 1999

That's because the stock was selling for 165 times earnings in 2000.

The Lesson is that: Overpaying for future growth is costly to investment returns

That's the total returns chart since 1/1/2000:

To paraphrase what famous investor Warren Buffett says “Price is what you pay, value is what you get”

Incidentally, Warren Buffett did warn investors about the excesses present in late 1999. However, he was ignored. Many believed that "he has lost his touch".

About 22 years later, he's still going strong however.

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