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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 78.39+1.3%Nov 19 3:59 PM EST
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To: The Phoenix who wrote (47505)1/30/2001 10:45:45 AM
From: Wyätt Gwyön  Read Replies (3) of 77400
 
It is ironic that people think Cisco is somehow advantaged at a time when its stock price is tanking. Certainly, Cisco is a much stronger ship than its smaller IT supplier brethren, and should be better at weathering a poor economic environment. But that's just survivorship--it doesn't have anything to do with increasing profitability.

From what I see, much of CSCO's business plan revolves around its stock--using it for M&A and to pay employees in lieu of full cash compensation. IMHO, this makes Cisco's reported profit results appear better than they actually are, because they do not have to expense R&D (they acquire instead) and because they do not expense option compensation (but instead are ironically rewarded with cash infusions from exercising employees and government tax credits--the greatest source of the vaunted cash-flow growth cited by the hopeful but poorly informed longs).

This two-pronged strategy is dependent on a strong stock price. I believe this stock-dependency of Cisco's business plan will be a downward drag on the stock in a weak IT-capex environment (much as it had a lifting effect on the way up during the bubble's expansionary phase). And Cisco may be forced to resort to making greater cash outlays for R&D/M&A as well as employee compensation. This will put pressure on profits, bringing attention to the high multiple this company trades at. In a cascade effect, this could result in further multiple compression, forcing the company to rely even more on cash outlays, and thereby further lowering profits in a vicious cycle.

All the above just my humble opinion.
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