Same Company, Different Arithmetic
In March 2000, Cisco Systems (ticker: CSCO) briefly became the most valuable company in the world with a market cap approaching $600 billion. It had earned roughly $3 billion of reported net income in the prior year. Cisco was profitable, dominant, and central to the build-out of the internet. It wasn’t a fraud. But at that valuation, the company traded at roughly 200x earnings — an earnings yield of just 0.5%.
CSCO had real earnings. CSCO had real growth. But the math didn’t work.
When the bubble burst, valuation collapsed. We purchased shares post-bubble when the earnings yield was approximately 8–10% and the company held substantial net cash on the balance sheet — a period when price, balance sheet strength, and arithmetic were finally aligned.
Fast forward to today and Cisco earns roughly $10–$12 billion annually — three to four times what it earned at the peak — yet the market cap sits closer to $200–$220 billion, a fraction of its 2000 valuation and at a multiple nearer 15–20x earnings. Earnings are dramatically higher; valuation is dramatically lower.
Investors who bought at or near the 2000 peak waited nearly two decades just to revisit prior price levels. Adjusted for inflation, many never fully recovered. That is the consequence of overpaying — even for a great business.
That’s the cautionary lesson as investors pile into tech names today with little to no earnings at extreme valuations: business quality cannot rescue an investment made at the wrong price. Arithmetic always has the final word.
Price determines return.
Devotion to Arithmetic.
Disclosure: Neither the author nor clients of Devotion Capital own shares of Cisco Systems (CSCO).
