Irish author Edmund Burke once famously said, “Those that don’t know history are doomed to repeat it.” Little did Edmund know his words would one day serve as the perfect warning for investors in Netflix, Inc.(NFLX) stock, who risk the same fate as Cisco Systems, Inc. (CSCO) stock owners in the late ’90s.
While the business world has evolved dramatically over time, human nature has remained more or less the same for centuries, and psychology and human nature are at the root of financial markets. The cyclicality of the stock market comes from emotions like fear and greed and motivations like stubbornness, envy and impatience.
Since investors in 1916 experienced these elements of human nature the same way investors do in 2016, market phenomena repeat themselves over and over again. Sure, the players may change, but the game is the same.
Today, I want to take a look at one of the darlings of the post-crisis bull markets, NFLX, and compare it to one of the darlings of the Dot-Com Bubble, CSCO, to see if history may once again be repeating itself.
NFLX & CSCO: Seeing Double?
When it comes to the bull case for NFLX stock, the 800-lb gorilla in the room is the stock’s astronomic P/E ratio, which sits well above 300. Without further context, it goes without saying that this valuation is absurdly high.
However, the rabid fans of Netflix stock will hardly let you get the words out of your mouth before they begin touting the company’s revenue growth rate, its rapid subscriber expansion, and the potential size of its global market. And yes, NFLX has been producing stunning revenue growth for a company its size over the past decade.
Here’s a graph of Netflix’s revenue, share price and P/E over the past five years:
Now let’s take a look at the same graph for CSCO from 1996 to 2000. Much like NFLX, Cisco was a tech giant with a huge market share and seemingly limitless expansion potential:
The Aftermath
How did things turn out…
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