AUGUST 11, 2000
STREET WISE
By Sam Jaffe
Is Cisco Falling Prey to Optical Illusions?
It may not be able to dominate optical networking the way it has routers and switches, and that could take the sheen off its stock
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John Chambers must be wondering what he needs to do to get a rise out of investors. After all, few companies can ever boast the kind of numbers Cisco Systems (CSCO) reported on Aug. 8. The company beat analysts' estimates by a penny per share, claiming revenues of $5.7 billion for the fourth quarter, ended on July 31. That's up 61% from last year's fourth quarter. A huge $1.2 billion of that was profit, which was 69% higher than the comparable quarter a year ago. In addition, executives raised their expectations for growth through the rest of the year. "The company continues to dominate the networking market," gushes Dain Rauscher Wessels analyst Sanjiv Wadhwani, who kept a "strong buy" rating on the stock.
Nevertheless, Cisco's stock didn't exactly soar on the news. The day after the announcement, it rose a respectable 4%. But Aug. 10 saw it fall almost 6%, to $64. Hardly the kind of reception you'd expect from such a boffo earnings announcement.
Why? There are lots of excuses. For one thing, Cisco stock had already run up from a low of $60.93 a week earlier, so one could argue that the market had already anticipated the good news. Also, this is one expensive stock -- the company has a market cap of $454 billion. It's pretty hard for any single institution or group of traders to move a stock that big.
SCIENCE FICTION. But both explanations ring a little hollow to me. The earlier runup wasn't enormous. And Cisco's stock is plenty volatile, despite its girth. Something else is dragging this stock down.
Cisco CEO Chambers seemed to offer a hint during his conference call explaining results to analysts. He mentioned that one of the core optical products due to ship this year, a high-end wavelength router used to send data over long-haul networks, wouldn't reach full production until 2001. A complete rollout was expected sometime in the next few months.
One product delay shouldn't set off alarm bells, especially in a cutting-edge technology area like optical networking, where machines are being produced that would have been considered science fiction a couple of years ago. But the problem might be just the tip of an iceberg that could mean trouble for Cisco in the future.
20/20 FORESIGHT. Optical networking, after all, is Cisco's future, according to Chambers. In the late 1990s, he gaÿÿ |
