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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 76.93+1.2%12:59 PM EST
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To: Techplayer who wrote (26859)7/13/1999 5:12:00 PM
From: Mr.Fun  Read Replies (1) of 77400
 
In the interest of generating useful discussion between the extremes of MM's passionate but overstated rhetoric and OG's somewhat dogmatic party-line perspective, here's my 2 cents:

1. Cisco's strengths - dominance in enterprise data networking and Internet class routing, extraordinary direct marketing position with its bread-and-butter market of large enterprises and independent ISPs, deep and talented management team - have been well documented on the thread. To date it has been an exceptional investment, generating significant loyalty from both individual and institutional investors.

2. However, there are legitimate reasons to be worried about the near term prospects of Cisco stock - certainly hedge funds are shifting their perspective, as the short interest has increased 35% in two months.

3. April operating margins were 27.8% vs. 31.7% in April 98 and 32.7% in April 97.

4. EPS growth was only 28.1% in FY98, and is projected by consensus to drop to 27.1% in FY99 ending in July and less than 25% in FY00.

5. Foreward P/E is now 76, more than 3 times FY2000 expected growth rate. Historical P/E levels for Cisco have been closer to 1.5 to 2 times projected EPS growth rates.

6. Cisco management is now giving guidance that Q2 FY00 (Jan) is a "wild card" due to Y2K concerns - current concensus is not reflecting any softness in that quarter, suggesting possible downward revisions which could catylize revaluation of the stock - a la 1997 when Asia concerns yielded a 40% haircut in Cisco shares.

7. Don Listwin has publically stated that Cisco's annualized run rate for Cable modem and DSL products would not top $500million until CY2000. These products will not ride to the rescue in the near term. Also, the game is too early along to declare the winner yet - AT&T has stated publically that its cable modem customers would not number in the millions until 2001.

8. I hear terrible things out of both Sprint and Telia (Sweden) which are Cisco's showcase accounts. There are alot of questions as to whether the Virtual Switch Controller can be delivered before mid-2000, over a year later than promised. The Cisco VSC is an absolutely critical part of Cisco's carrier strategy. The Level3/Lucent deal for the SoftSwitch had to hurt.

9. The challenges facing Cisco are much more difficult than most investors understand. While I believe Cisco will surmount them, I am quite concerned that it will have temporary setbacks along the way. Current valuations will not countenance even a small disappointment.

BTW some corrections: Enterprise sales are about 28% of total for NT and 24% for LU. LU's enterprise sales of $7.7B in CY1998 are pretty close to CSCO's $8.2B.
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