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.
Q2 2022 hedge fund letters, conferences and more
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.
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:
