Written by: Sean Peche | Ranmore Fund Management
“It’s 24 years ago, and your hunch is the “internet” will be big
A friend quotes Mark Twain
“During the gold rush it’s a good time to be in the pick and shovel business'
Wait, Cisco make all the gear that directs Internet traffic - internet “picks and shovels”!
You download Cisco’s 1999 10k titled,
“Capture the Momentum”
Perfect!
You read, “Cisco is the worldwide leader in networking for the internet”
And see a bar chart showing
- Sales growing from $2bn in 1995 to $12bn in 1999 and
- Net income growing from $450m to $2bn
There’s a picture of their CEO, John Chambers, saying,
“We have been recognized as the fastest growing, most profitable company in the history of the computer industry”
“The internet is driving a global internet economy that is creating unprecedented opportunities for countries, companies and individuals around the world and Cisco is proud to play a key role in leading this internet economy”
And
“One day, a business that is not on the internet will not be in business”
That’s it, I’m buying & holding!
Roll forward 24 years and Cisco is now generating
- Sales of $58bn, 5x more than in 1999
And
- Net income of $14bn, 7x more
And Chambers was right, “if you aren’t on the internet, you aren’t in business”
So you high five yourself and go to count your winnings
But you’re down -23%
This can’t be right
- 23% after 24 years?
When I nailed the thesis?
In fact internet traffic volume is WAY higher than I forecast thanks to:
- streaming
- gaming
- phones with 4 cameras
- TikTok and Facebook etc
and yet I lost money over 24 years?
Even worse, in October 2004 you were down 84%!
But how?
Very simple - you overpaid trying to “capture the momentum”
Because when you paid $400bn for $12bn of sales in 2000, you paid 33x sales
which is pricing in lots of great news
Because even if your profit margin was 100%
You’d need 33 years to recoup your investment if you received all profits in dividends
Spoiler alert - tech companies aren’t big dividend payers, they need the cash to buyback shares from staff..
What’s your point?
People who own Nvidia because they make the ai “picks and shovels” may want to learn from this history
Because they’re paying 40x sales
And yes, “ai will change the world” (like the internet)
And yes, “Nvidia is the leader” (like Cisco)
And yes, “Jensen Huang is a visionary” (like Chambers)
But unlike Nvidia, Cisco’s largest clients weren’t all working on their own solutions..
And Cisco was working WITH China and China Telecom back then
whereas Chips & China don’t mix well these days
Now Nvidia does have costs & generates free cash flow
but it spends that on buying shares from staff and R&D trying to fend off customers who could soon become competitors…
So before you start rationalising your technology investments by quoting Mark Twain,
Just remember
He never said could you pay ANY PRICE for those ‘picks and shovels'.
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