Some random thoughts on Cisco's valuation:.. just trying this on for size...don't hold me to the specific numbers... all are rounded.
Two years ago CSCO wasn't addressing the service provider market - they were almost solely focused on the enterprise space - perhaps a total market size of $50B. In FY 1998 Cisco had pre-tax income of just over $2.8B and a PE of about 80 - high but given the past two years it would appear justified. This year they earned approximately $5.6B - about 100% earnings growth over the two year period. At the close of FY1998 Cisco share price was about 18 (split adjusted). So, if we assume linearity and that share price should keep pace with earnings growth Cisco's share price would be about $36... right? Of course one could argue that the PE should be more in line with earnings growth to begin with but clearly this doesn't hold much water considering the way this company has executed. Any fund manager worth his/her salt will place a premium value on a company that executes like CSCO has. But of course there are those that take the opposing view - suggesting Cisco was overvalued then as it is now. They would probably argue the stock multiple should match earnings growth (50%). This would yeild a CSCO split adjusted July 1998 share price of $12 and a current proposed share price of $24. Either way these numbers serve as a data points.
So, depending on your perspective and assuming linerarity one would assume a CSCO price of something between $24 and $36 today.... all else being equal. right?
Now, during the past two years Cisco has embarked upon what appears to be a successful assault on the optical market, the cable market, the DSL space, the circuit switched telephony market, and worked to expand numerous new business technologies in existing spaces. During this time competitors have also left the enterprise space leaving Cisco there to gobble more market share. So given all this we have seen Cisco's revenue growth accelerate - that's right - accelerate through the past 8 or more quarters!
Now, today the total market addressed by Cisco is perhaps 5 times the size of the market they addressed in FY1998 - maybe even larger. Cisco is just scratching the surface of many of the service provider opportunities they recently targeted. So, the question is really how much are these markets worth to Cisco and what's Cisco's ability to execute. Is it an additional 50% in stock value? 100%? Some might argue Cisco attacking a market 5 times larger would easily justify a share value at four or five times the mulitple as they had in 1998 - after all the market is far greater and Cisco has had a knack of flawless execution.
If we take a pragmatic view and assume that since the market is five times larger than 98, then Cisco's forward multiple should support at least double the valuation - especially given the astronomic growth of optics, the internet, and wireless.. two of which are new markets for Cisco one would come up with a share price of something between $48 and $72. (Funny how we've been trading in this range.) Of course, as I said before one could certainly argue a market 5 times the size as they addressed in 1998 should justify far more than a double in value which would push us over $72. Just depends on your bias I guess.
The point - Cisco is not as overvalued or a risky as some here would like to believe. At the same time valuations over $90 would seem pretty heady.
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