CSCO and the Trillion dollar mark. From Bloomberg. Jeff
quote.bloomberg.com
Technology News
Sat, 12 Feb 2000, 2:56am EST
Cisco Systems May Be Headed for $1 Trillion Market Value: David Wilson
By David Wilson
Cisco May Be Headed for $1 Trillion Market Value: David Wilson
(Commentary)
Princeton, New Jersey, Feb. 11 (Bloomberg) -- Less than five
years ago, the market value of the Nasdaq Stock Market's companies
exceeded $1 trillion for the first time.
Now there's speculation that a single Nasdaq stock -- Cisco
Systems Inc., the world's largest maker of computer networking
equipment -- may surpass that plateau.
Paul Weinstein, an analyst at Credit Suisse First Boston,
raised the possibility that Cisco might get there in two years. In
a report published after the company posted fiscal second-quarter
results this week, he said the stock will have to rise 50 percent
each year to reach the trillion-dollar mark.
``That's not unreasonable,' said Weinstein, who has a
``strong buy' rating on the stock. He cited his estimates that
sales will rise 50 percent during the year that ends in July and
40 percent in the following year. As it expands in areas such as
equipment for wireless networks, ``Cisco's market opportunity is
larger than ever before,' the report said.
Even a more conservative calculation, done independently by
yours truly, shows that the San Jose, California-based company's
on track to surpass $1 trillion in market value by the end of
2002.
This approach uses analysts' average estimates for revenue
growth, as compiled by First Call/Thomson Financial, and assumes
its share price will grow by the same percentages as its revenue.
It also assumes the number of shares outstanding will increase at
the pace of the past three calendar years.
Either way, the numbers are staggering -- especially for a
company that's only existed since 1984 and that's days away from
its 10th anniversary as a public company.
Growth, Growth, Growth
Cisco sold $50.4 million of stock in its initial public
offering, and the shares began trading on Feb. 16, 1990. Since
then, its market value has doubled each year on average as its
sales climbed at a 70 percent pace.
Those first shares are valued at $54.8 billion, based on
yesterday's closing price of 135 15/16. The stock's rise helped
boost the Nasdaq's total market value above $1 trillion in July
1995; it exceeds $5.7 trillion today.
The statistics reflect Cisco's success in selling what its
Web site calls ``end-to-end networking solutions.' Its routers,
switches and software combine to direct the flow of information
among computers in a network, in the same way that a building's
plumbing governs the flow of water.
Results in its latest quarter, ended Jan. 29, showed that
revenue jumped 53 percent to $4.35 billion and net income almost
tripled to $825 million, or 23 cents a share. The revenue figure
exceeded analysts' forecasts of $4 billion.
The company released its earnings late Tuesday, and its
shares rose more than 6 percent in the next two days. The rally
pushed it past General Electric Co. into second place among the
world's most valuable companies.
Only Microsoft Corp., the largest software maker, has a
higher market value. It became the first company to surpass the
$500 billion mark last July. Since then, its value has risen to
$545 billion.
More Growth
Cisco's market value more than doubled in the same time
period, and is now 40 percent higher than the combined value of
its two biggest competitors, Lucent Technologies Inc. and Nortel
Networks Corp. It surpassed $300 billion on Nov. 23, and vaulted
above $400 billion at the start of this month.
Revenue and net income are rising faster at Cisco than at
Microsoft, whose sales in the December quarter rose 17 percent as
net income went up 22 percent. Microsoft also has to contend with
a possible breakup, resulting from a federal judge's finding last
year that it had a monopoly on some personal-computer software.
``There's no shortage of growth' for Cisco, Credit Suisse's
Weinstein said in an interview. The company stands to gain from a
push into equipment for telecommunications networks, especially
wireless ones, and from companies' desire to enable their computer
networks to carry more data, he said.
Cisco made its first move into wireless in November, when it
agreed to acquire Aironet Wireless Communications Inc. for stock
now valued at $1.47 billion. Aironet makes a radio transmitter
that enables PCs to communicate with networks.
If the stock gains 50 percent a year during the next two
years, as Weinstein suggests, its price would surpass $300 a share
by February 2002. Multiply that number by the 3.42 billion Cisco
shares outstanding as of last December, and the result is more
than $1 trillion.
Different Numbers
Weinstein's estimates of sales growth estimates don't match
up with the calendar because of Cisco's fiscal year. On average,
analysts expect sales increases of 42 percent for the 12-month
period ending next January, and 32 percent for the following
period, based on First Call's numbers.
Using those figures in place of the 50 percent forecast
reduces the projected market value. Another adjustment does the
opposite: increasing the number of shares outstanding to reflect
possible acquisitions and the exercise of stock options.
Excluding stock splits, Cisco's shares outstanding have risen
5 percent each year since 1997. It paid for most of the companies
it bought with stock, rather than cash. Option exercises added
about 80 million shares each year, because the company doesn't
repurchase stock to compensate as others do.
Here's the end result: If Cisco's stock rises 42 percent in
2000 and the company has 5 percent more shares outstanding as of
Dec. 31, it will end the year above $152 a share. That will lead
to a market value of $546 billion.
The latter figure will rise to $757 billion at the end of
2001, based on the 32 percent growth rate. Taking the same rate
for 2002, the company will end the year at $1.05 trillion.
Similar Caveats
Both methods have their shortcomings. For one thing, they
don't take into account that Cisco's shares have never declined
for an entire year. The closest they came was in 1994, when they
gained just 8.7 percent.
They also fail to recognize that the company might run into
problems with its business, that sales may not meet expectations,
or that a broader stock market decline may drag down the stock.
Cisco trades at 133 times the average estimate for the fiscal
year, so it's vulnerable to the latter.
Even so, the possibility that Cisco might be a $1 trillion
company shows just how much computers and the Internet matter to
the stock market.
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