Pets.com, Webvan, eToys.com.
Many people might have never heard these names.
These companies are dead.
The period between 1995 and 2000 was wild – the dot com bubble.
Computers were new. The internet was new.
Everybody was sure computers would change the world.
What’s better than computers?
Millions of computers talking to each other. Or, in other words, the internet.
People knew the upside was huge. They just did not know how huge.
Silly ideas were born. Those gave birth to silly start-ups.
Good ideas and start-ups were born too.
Many start-ups raised millions of dollars based just on having a ‘.com’ in their names.
Extremely low revenues, high costs, and insane valuations were the norm.
Some prominent investors warned that a bubble was forming.
In light of that, some smarter minds came up with an idea.
“During the gold rush, it's a good time to be in the pick and shovel business” – Mark Twain.
Everybody is investing in companies that work on the internet. How about investing in companies that support the internet?
That’s a good bet, right?
Two names were prominent: Microsoft and Cisco.
Microsoft made Windows – the software that made it possible for most people to use computers.
And Cisco made internet network infrastructure. Hardware company.
In a world of people rushing to ‘dig for gold’, these two seemed to be selling ‘shovels’.
Cisco
Leonard and Sandy met on the Stanford University campus in 1977.
They were both working on university minicomputers.
There was a peculiar problem. They wanted to find a way to connect the computers inside the campus. A network of computers.
Leonard and Sandy got married by the time they developed a solution to this problem – a network router.
But running it was costing them money. The only way to make money was to sell their routers to those who also needed them.
In 1984, they founded the company Cisco Systems.
The company developed more products – hardware products that helped connect computers to computers.
It became a publicly listed company in 1990 via an IPO – its shares were available on the stock markets.
This was the company people were betting on in the dot com bubble period.
Some start-up ideas may fail. Some may succeed.
But the company that makes the internet possible? That wouldn’t fail, right
Investing in Cisco
That theory – that Cisco would not fail – turned out to be true.
The thinking was correct.
Almost 40 years since its establishment, Cisco is still around today.
Not just surviving, Cisco’s revenues kept growing. It remained profitable and continued improving.
It acquired smaller companies and expanded into newer markets.
Investors of Cisco made good money. But not all of them.
Cisco stock price through the years:
1990: $0.08
1995: $1.80
2000: $X
2005: $18.00
2010: $19.00
2015: $24
2020: $43
Today: $50
(These are approximate share prices; stock split adjusted).
And of course, we have not shown the stock price in 2000 (on that later).
From 1990 to 1995, it gave a return of about 86% per annum – astounding.
Since 1990, it has given a return of about 20% per annum – really good.
Since 2010, it has given a return of about 7% per annum – not great but not terrible.
Its performance seems like many other tech companies – very good growth in the beginning. And later a muted growth.
Cisco in Dot Com Bubble
Between 1995 and 2000, millions of investors thought Cisco was selling shovels in a gold rush.
A company playing a crucial role in running the internet was believed to be a good investment.
And this caused the stock price to climb – more demand, higher prices.
At its peak, in 2000, the stock price reached $77.
Soon after, the dot com bubble burst.
The stock price came crashing down to the $10 to $20 range.
A massive number of investors who bought the stock at these high levels were sitting on losses.
If some of those investors are still holding their Cisco stocks, they’re still in loss.
Price of Cisco stock at the height of the dot com bubble in 2000: $77
Price of Cisco stock today: $50
For a short period of time, Cisco was the world’s biggest company with a market cap of over $550 billion.
Today, it is around $200 billion.
The dot com bubble saw many rubbish companies do outrageous things – for some time.
Avoiding investing in such companies is a must.
But there’s another lesson to be learned.
Investing eyes-shut in a good company (like Cisco back in 1995) also does not guarantee good returns.
If you buy a stock at unnaturally high prices, it can be as good as investing in a bad business.
There were a few other companies like Cisco – that have not reached the levels touched in 1999-2000.
Intel – the chip maker that powers so many laptops is another such stock.
Qualcomm – the chipmaker that runs many smartphones – took about 20 years to reach the peak it touched in 2000.
Of course, there are other examples.
Some tech companies have done well and blazed past their 1999-2000 levels long back.
Microsoft, Apple, and Amazon are easy examples.
The takeaway is simple.
Overvalued stocks can reduce returns. Sometimes, the returns can even be negative.
Avoid.
But this is also what makes investing in stocks difficult.
There is no clear formula for finding out if a stock is overvalued.
Finding a stock's valuation requires us to estimate the future cash flows of a company.
Based on that, we decide if a company seems undervalued, fairly valued, or overvalued today.
Even doing that requires skill, knowledge, and experience.
There’s no substitute for that.
The images above were generated using AI tools.
Quick Takes
+Number of air passengers in India rose 5.7% year-on-year to 1.31 crore in Aug. In terms of ‘on-time performance’, Akasa Air stood 1st, followed by Vistara (2nd), Air India Express (3rd), IndiGo and Air India stood 4th: DGCA.
+Ford plans to restart manufacturing in Chennai for export. The company has submitted a Letter of Intent (LOI) to the Tamil Nadu government: President, Ford International Markets.
+India’s inflation rose to3.65%in August (vs 3.54% in July).Food inflationrose to 5.66% (vs 5.42% in July).
+Industrial production in India rose 4.8% year-on-year in July (vs 4.2% in June). Manufacturing rose 4.6%, mining rose 3.7%, and electricity production rose 7.9%: MoSPI.
+India’s palm oil imports fell 26% to 7.97 lakh metric tonnes in Aug (vs July). Soy oil imports rose 16%, and sunflower oil imports fell 22.5%. Total edible oil imports fell 17% to 15.3 lakh metric tonnes: SEA.
+The central government announced ‘PM E-Drive’, a Rs 10,900 cr subsidy scheme for EVs. The scheme includes subsidies for electric buses, 2 and 3-wheelers, hybrid ambulances, and charging stations.
+NPCI reported a 37% year-on-year rise in net profit to Rs 1,134 cr in the financial year 2024.
+P N Gadgil Jewellers IPO was subscribed 59.41 times. Retail subscription: 16.58 times.
+India's coal production rose 6.4% in the April-August 2024 period (vs April-August 2023). It stood at 384.07 million tonnes: Coal Ministry.
+Inflation (CPI) rate in the USA fell to 2.5% in August (vs 2.9% in July). Core inflation (excluding food and energy sectors) remained unchanged at 3.2%.
+Bajaj Housing Finance IPO was subscribed 63.61 times. Retail subscription: 7.04 times.
+Kross IPOwas subscribed16.81 times. Retail subscription: 10.76 times.
+Tolins Tyres IPO was subscribed 23.89 times. Retail subscription: 21.52 times.
+India’s net mutual fund investment fell by 43% month-on-month to Rs 1.08 lakh cr in Aug. Equity mutual fund investments rose 3%, debt mutual fund investments fell 62%, and sectoral/thematic mutual fund investments fell 1%: AMFI.
6-Day-Course
Theme of the week: value investing
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
Value investing judges a stock on its _____________ potential returns.
-Long-term
-Short-term
-Lifetime
Question 2:
Fundamental ratios such as PE or PB ratios, DCF, etc. should not be used alone, ignoring all other metrics, while selecting a good undervalued stock.
-True
-False
Question 3:
Waiting for a stock to reach its ‘expected fair price’ for too long and missing out on other good investments is called as _____________.
-Fallacy of price
-Value trap
-Opportunity trap
Question 4:
After doing due diligence on a stock by using methods of value investing, every investor arrives on a similar approx fair price of that stock.
-True
-False
Question 5:
PB ratio of a stock is the ratio of its market value to its ____________.
-Fair value
-Future potential value
-Book value
Answers:
Q1: Long-term
Q2: True
Q3: Value trap
Q4: False
Q5: Book value
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest