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  1. Home
  2. / Investing
  3. / Stocks

What Bubble-Era Cisco Can Tell Us About Zoom and Other Pandemic Stocks

If Cisco was in a bubble back then, arguably Zoom's recent bubble was an even bigger one.
By BRAD GINESIN
Jan 11, 2022 | 01:44 PM EST
Stocks quotes in this article: ZM, PTON, CSCO

Shares of companies that benefited most from the Covid-19 pandemic restrictions were clearly in a bubble. Specifically, I'm referring to Zoom Video (ZM) and Peloton Interactive (PTON) . Both of these companies had the exact right product at the right moment in time, and expectations ran too high.

The stock gains of these names were reminiscent of the Nasdaq bubble in 2000, where the companies that stood to prosper from the internet were taken to unsustainably high levels.

Looking back at the technical and fundamental picture of one of the Nasdaq's darlings, Cisco Systems (CSCO) , may be instructive and offer clues to divining the future of the pandemic-bubble stocks.

The Cisco Corollary

During the Nasdaq bubble, Cisco also had the right product at the right moment -- routers and switches needed to build out the internet. The company provided the "picks and shovels" as web traffic boomed.

Cisco had all the Wall Street-love imaginable. The stock had raced to a heady market cap of half a trillion in 2000 with the full support of analysts. Morgan Stanley declared that the shares needed to be valued on a different paradigm, and Cisco was headed to a trillion-dollar market cap.

Post-bubble, Cisco could be a good corollary for the stock of Zoom and other pandemic winners. What sort of returns can you expect from Zoom and the like by looking back to Cisco, and can losses be recouped?

For starters, 20 years later Cisco hasn't surpassed its all-time high from the bubble era. That's after reducing the outstanding share count by 42% (7.4 billion to 4.2 billion); increasing its revenue by 178% ($18.9 billion to $52 billion); and increasing EPS from $0.53 to $3.42, up a staggering 645%.

Remarkably, Cisco's current market cap is about half of its peak valuation from 2000. It's important to note, Cisco started paying a dividend a decade ago, increasing the cash payment to shareholders annually.

What jumps out about Cisco are the steady profit margins and the copious cash flow produced during the bubble straight to today.

A Bigger Bubble?

Zoom's positive cash flow does give some hope to investors more so than Peloton, which is currently cash flow negative. Yet, if Cisco was in a bubble back then, arguably Zoom's recent bubble was an even bigger one. At its peak, Cisco's market cap hovered at roughly 26x sales. Zoom's price to sales topped somewhere well north of 70x.

Investors in Zoom probably won't find comfort in seeing that post-bubble, Cisco shares gave up years of gains -- albeit in the middle of a recession -- falling 90% before hitting bottom. Plus, Cisco needed to put its cash flow to work before the shares regained traction, even as the revenues continued to grow.

Cisco spent years buying back stock and making acquisitions, all with a P/E under 20. With the reasonable valuation, the buybacks steadily cut down the outstanding shares.

Although Zoom's shares have fallen 70% from the highs, growth has slowed dramatically and the price to sales is still 12x with a forward P/E of 35. The pullback doesn't seem at all irrational, as one top holder recently suggested. If history is any guide, ZM shares can see further downside over time.

(Cisco is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells CSCO? Learn more now.)

A year ago, Zoom raised money in a secondary at $340, bulking up its cash reserves to over $5 billion. Like Cisco, Zoom will probably need to put that cash to work -- either through buybacks or savvy acquisitions -- before Wall Street favors the shares again. Zoom's stock will no doubt have strong bounces, but it's likely the shares are destined to go lower before bottoming.

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At the time of publication, Ginesin had no positions in any securities mentioned.

TAGS: Fundamental Analysis | Investing | Stocks | Trading | U.S. Equity

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