I hate to spread gloom and doom, but here's a pretty interesting (long!) interview with Ravi Suria (the guy who made his bones dis'ing Amazon). While I don't follow the telecom world much, his arguments seem pretty reasonable.
aol.thestreet.com
At the end, he touches on AMZN, saying (ouch!): "As somebody said the other day, 'Anybody who sold one paper bag for a 10-cent profit made more money, a heck of a lot more money, than Amazon has over the past five years.' Debtholders will most likely end up owning the company. "
Here's an excerpt in which he argues that CSCO is more of a cyclical stock than a growth stock, and that they're at the peak of their cycle. Personally, my concerns about CSCO are twofold:
-the market CSCO is trying to enter (telecom) bears little relationship to the market of which it is a Gorilla (enterprise networking), and I'm not sure how they can leverage their Gorilla power into telecom (Moore called this Gorilla Adjacency Power on the email list a while back--I think it's a very important concept). This is similar to Thomas' skepticism of Microsoft's ability to leverage it's desktop OS Gorilladom into internet services, although I think CSCO may have an even harder time.
-Even if they should succeed in the telecom space, I doubt they can have anywhere near as much power over that value chain as they have over their current one. Conventional wisdom has it that telecom companies won't stand for a Gorilla in their midst. And they're big and few enough to prevent it from happening. But then, being a King in the $100 billion telecom world ain't bad either, I guess.
Brett D. Fromson: What about Lucent and Cisco?
Ravi Suria: Lucent's revenue estimates for 2001 have come down all the way from $45 billion to $25 billion. That is a contraction. The telecom equipment companies that will show the biggest contractions are those with the largest revenues, because they are the ones that captured the most dollar amount of revenues from money that was borrowed over the last couple of years. You could see the revenue bases of companies like Nortel and Lucent actually come down by 30% to 40% before the revenues stabilize. Cisco is getting to that revenue level, too. Just to show flat revenue growth, Cisco must replace more than $20 billion in revenues.
On the other hand, Ciena (CIEN:Nasdaq) , with $1 billion in revenues, needs to find only $1.5 billion in revenues to show 50% revenue growth. The point is that once you get big, it becomes harder to show growth, especially if you're in a capital goods industry like these companies. You have to convince the person who bought 10 routers this year to buy 10 more next year and then another guy to buy another five routers to show 50% growth. The larger the company, the more I expect to see a contraction in revenues.
Brett D. Fromson: Obviously, you do not see a return to the growth rates of 1998-2000 to return anytime soon.
Ravi Suria: I do not. The extra lump of demand for this equipment just does not exist from sustainable cash flows. It just doesn't exist.
Brett D. Fromson: After the revenue contraction, when would you expect revenue levels to return to 1999-2000 levels?
Ravi Suria: That's hard to say. For companies to spend money on telecom equipment, they have to get it from somewhere -- internal cash flow or the capital markets. In the last few years, it has come from the markets. On the telecom services side, people are beginning to understand that these are no longer growth companies -- they are highly leveraged companies. On the telecom equipment side, the market will realize that they never were secular growth companies. They are capital equipment companies; they're cyclical just like the semiconductor equipment companies. You don't find semiconductor equipment companies giving vendor financing for customers to buy their equipment because they know there's always a downside to a cycle. This is something the telecom equipment manufacturers forgot. "It's ironic that the unprofitable tech IPO cycle started with Netscape, the first Marc Andreeson IPO, and probably ended with his next IPO, Loudcloud." |
