If you own a lot of any one stock – especially a highly-valued tech stock – you should think seriously about selling some of your holdings.
The reason: to avoid the fate that befell owners of a high-flier from the dot-com era, Cisco Systems. It can happen again. We don’t know who the next victims will be, or when. But if you own a very big chunk of a very high-flier, you inevitably have some risk.
You may dismiss this risk. Maybe it’s your employer stock. The stock has done extremely well. The company is strong. The future looks bright. But please, take two minutes to read on before you decide there is no risk.
Cisco’s story is not a story of fraud (think Enron). It’s not a story of overreach (think GE). It’s not a story of deregulation (think AT&T). You can read more about those stories here.
Cisco’s story is of a good company that kept being a good company – but of a stock that went down a lot and has yet to recover, 25 years later, because it was terribly overvalued.
Look at the chart below. It illustrates Cisco’s revenue from 1996 to today. Revenue has climbed by about 10 times.
Now look at the stock price chart below. The stock went from $2 in 1995 to $80 in 2000, becoming the world’s most valuable company, with a total capitalization of over $500 bn.
Within two years of the peak, Cisco’s stock had fallen by almost 90%. It has never fully recovered and is currently trading about 30% below the 2000 high.
These two charts don’t seem to be for the same company. But they are. The reason for the dissonance: stockholders in 2000 expected a lot more than steady growth. They expected more of the sky-rocketing growth Cisco recorded in the 1990s. Once shareholders decided Cisco’s growth would slow, the stock was doomed.
On 12/31/2024, an investor owning the 100 largest companies on NASDAQ – a fast-growing, tech-heavy group – had seen a $100 investment grow to $523 over 10 years. The underlying businesses certainly did well over that period. For the average company, $100 of revenue had grown to $260. But that is a far cry from the stock price appreciation. Investors clearly have high expectations, just as they did for Cisco in 2000. Any sign that growth may slow could hit a stock price very hard.[1]
If you own a large amount of Apple, Nvidia, Microsoft, Amazon, Google, Meta or Tesla shares, don’t ask yourself if their business will collapse. Almost surely, these companies will remain profitable powerhouses for years or decades to come.
Instead, ask yourself about the bigger risk. Will the company’s growth slow over the next 10 or 20 years, and do investors know that? If it does and they don’t, the shares will almost surely falter.
The bigger a company gets, the harder it is to grow at a high rate. In the case of Cisco, that difficult transition cost investors dearly. It can happen again.
[1] Information is as of 12/31/2024 and is based on the performance of QQQ, an exchange-traded fund tracking the top 100 stocks listed on NASDAQ, as reported on the QQQ website.
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