No Skidmarks in Cisco's Growth
By Adam Lashinsky
Silicon Valley Columnist
Originally posted at 1:03 PM ET 11/3/00 on RealMoney.com
Forget the employment report and the looming presidential election, for tech-stock investors the most important evening of the rest of the year will be Monday, when tech giant Cisco Systems (CSCO:nasdaq - news) reports its quarterly earnings.
Six months ago, ahead of Cisco's quarterly report, two major financial news publications weighed in on the state of the mighty networking-equipment company -- in what journalists call a "curtain raiser" or "walk-up." That's when Fortune (in a puffy homage) and Barron's (in a nasty screed) thoroughly described Cisco's strengths and weaknesses. What's surprising, particularly given The Wall Street Journal's thorough and exceedingly balanced piece Friday morning in advance of Monday's earnings report, is how little the situation has changed since then.
Way back then, Barron's worried about how the law of big numbers eventually would catch up with the leading maker of equipment that corporate America uses to connect to the Internet. Now, The Journal warns that even the mighty Cisco can't maintain its growth rate forever. Then, Fortune pointed out that Cisco does everything well and will find new ways to grow. Now, The Journal informs us that a capital-expenditure slowdown by big telecommunications carriers affects Cisco less than, say, Lucent (LU:NYSE - news), because Cisco's equipment is more critical. Then, Cisco's stock -- all-important to the tech-investment community because it's the only one of the former Four Horseman (the others: Dell (DELL:Nasdaq - news), Microsoft (MSFT:Nasdaq - news), Intel (INTC:Nasdaq - news)) that hasn't broken -- vacillated around the mid-$60s. Today, it trades around the mid-$50s, a difference to be sure, but not as dramatic a drop as the others have experienced.
My observation at the time was that the detailed treatments both publications gave Cisco showed just how difficult it is to figure out what to do with the stock. There is simply no arguing that Cisco isn't overvalued on a historical basis and eventually will have trouble growing into its valuation. There's also no arguing that it's one of the best companies in the world and that, unlike Mr. Softee with the PC, its target markets continue to grow.
What is noteworthy about The Journal article -- compared to the half-year-ago Fortune and Barron's pieces -- was its very balance. It quoted one stiffly bearish and one exuberantly bullish sellside analyst. It laid out without prejudice the law-of-big-numbers conundrum. But it also tipped its hat to the notions that, 1) Cisco always seems to find a way to find the growth it needs; and, 2) Investors want to keep awarding Cisco some kind of leadership premium, to coin a phrase, so long as it doesn't screw up.
That's why the most important element of Monday evening's conference call will be Cisco's guidance. It will be in the drawled tone of John Chambers, the CEO, and what he says about future markets. Cisco always beats consensus per-share earnings estimates by one penny. Chambers' outlook is all that matters.
One other relevant element of the Cisco story that hasn't changed is the way Cisco acquires other companies. Barron's fretted that accounting-rule changes would make it difficult for Cisco to maintain its acquisitions engine. I doubted that at the time, arguing that even if Cisco were forced to adopt an accounting treatment that caused it to report noncash losses, that the Street would look through those losses. Since that article has appeared, Cisco has announced 10 acquisitions, worth a combined $3.5 billion. This acquisitions engine -- the vehicle for much of Cisco's hoped-for growth -- hasn't stalled yet.
Shares of Cisco have stalled, however. If the Nasdaq Composite -- still the proxy for tech stocks that matters -- is to recover, Cisco's stock must recover. |
