Well, I guess it's par for the course that any melding of our minds would be short lived... lol... but what's new, huh?
As usual, we start from a point of agreement: Cisco will make more money from their enterprise business than their telco business. Everyone knows the telcos are in hock up to their eyeballs and don't have the resources to really start spending the big bucks again yet. The enterprise customers do have the bucks and are still spending on IT in a very focused profit conscious way.
And remain aligned even here: Also remember that many big companies would like to outsource their networks. However, it has to be cost effective. If it's not, then they'll build their own.
But then we see things a bit differently. Because I don't think it's at all likely for the predicate of this sentence to be true: If prices go up too much, enterprise customers start shying away from service providers and build out their own networks.
There's a mass of debt out there, yes, that's for sure. In fact, so much that we're going to see a lot of it evaporate by default. Psinet, Nextel, Global Crossing, At Home, et. al... the tip of a titanic iceberg.
One by one the weakest will continue to go under and survivors will strip the corpses of productive assets and using them to generate revenue to service the debt. Like AT&T & At Home.
Which environment has the following dynamics:
(a) reduction in net debt (by default, rather than just by payment)
(b) increase in network capacity through redeployment of underused capital assets rather than new build
(c) stagnation in network infrastructure purchases (re-deployment of existing assets vs. purchase of new assets)
Which doesn't mean any increased business for gear makers like Cisco and Nortel and LU.
Furthermore, in such an environment it is not obvious that prices would get bid up to anywhere near par relative to a roll-your-own solution. Not until such time as the weakest hands have folded. In such an environment, smart creditors facing pennies on the dollar recoverable in default or dimes on the dollar in ongoing payment... well, any port in a storm.
We have entered a phase of ruthless cutthroat consolidation where only the strongest with the deepest pockets will survive. Reading some historical stuff on the railway buildout and substituting "internet" is absolutely fascinating.
So just like the steel producers and the locomotive manufacturers, it's not clear that "either way, Cisco benefits" when one peels off the lid and looks inside. Not clear at all.
Me, I think Cisco is going to see some stabilization in their business, and likely growth before NT and LU see the same in theirs.
Which is good news for Cisco. And if we were merely cheering on a horse-race for management grittiness then we could probably leave it there.
But we are here as investors. Faced with a $20 stock price (thereabouts) and well able to earn $1.10 per year for every share of Cisco we sell merely by investing risk-free in T-bills. Or double our money in ten days by riding Enron as it swings between $0.55 and $0.80 and back down again.
So whether we are long-term investors or short term traders there are other vehicles on which we can make a buck.
So we should comment from that make-a-buck perspective.
In which light, the potential profit from those tens of Billion in revenue that those broke carriers are sending to LU and NT and Alcatel and Siemens... well, by my calculations, that would go about half way towards justifying Cisco's stock price. The other half we expect to come from enterprise as a stretch objective.
And yet the stock is priced as if the whole thing is in the bag. So I think they need to get the carriers.
Not to survive or grow the business. But to deserve a $20 stock price.
Of course, there's deserving and having. We all know the market is capable of creating a very high stock price to companies deserving something slightly less. So $20 isn't a stretch, with or without the carriers. But I wouldn't bet my retirement on it over the long term. Not at these prices. I suspect there will be better (lower) entry point before the mess clears. |
