Monday, August 11, 2025
Valuations still matter.
Even with the market hitting all-time highs, people want more and will ride the hottest stocks for more gains. But prices matter. While investors want a good growth story, overpaying for a flashy stock is dangerous.
As an example, think of Cisco Systems Inc. (CSCO) back in the early 2000s. Cisco reaped the benefits of the dot-com boom. It isn’t a dot-com company, but makes routers and switches that enable the Internet and online companies.
Cisco’s position was dominant, with strong margins and returns on capital. By 2000, the dot-com bubble expanded. Telecom companies invested in network buildouts as investors expected growth. Cisco’s share price soared to 63 times its sales.
Of course, the bubble burst. Wild spending stopped. Cisco started losing money and its valuation collapsed. Shares fell 86% by 2001.
And yet, the rosy predictions about Cisco’s business came true. The company still dominates networking equipment. Its operating income has grown for 25 years. In the last decade, shares have gained 12.8% per year, including dividends.
This is a great example of the valuation life cycle. A young, fast-growing company sports a high multiple. The multiple decreases as the company matures and the hype fades, but rising earnings and a lower multiple can still combine to deliver positive returns.
Cisco’s operating income averages more than $3 billion per quarter and its valuation shrank to less than five times sales. But if you bought Cisco in early 2000, you’d have lost money over the past 25 years. If you bought at almost any other time following the dot-com crash, you’d have done well.
So, pay attention to prices. Be careful with stocks that can end up losing a lot of money when the hype inevitably dies down.