What John Mauldin has to say about CISCO:
Blues Brothers: Enron and Cisco
I have written about Cisco before, but in light of the Enron debacle I want to go back and visit that company again. Let me first
state that as a company, Cisco is not an Enron. They have $19 billion
in cash, have dominance in a lot of their markets and will be around
for a long time.
But there is one thing Cisco and Enron have in common. Both have
highly charismatic chairmen who cheerlead their stocks. The $440
billion in market cap that Cisco has lost for investors is more than
the drop in Enron. Where is the outrage for Cisco? I would probably
not care so much, but every week I talk to new clients, many of them
retired who could not afford to lose the money who have lost large
sums of money investing in Cisco and companies who make promises like
Cisco.
John Chambers has consistently told us that things would be better,
just as Ken Lay did, even while the stock and the companies prospects
were dropping like a stone. Is he clueless as sales drop 30%? Where
are the realistic warnings?
Now Chambers tells us, with a straight face, that 30% compound
revenue growth is in the cards as far as the eye can see into the
future.
Two years ago I said that was impossible, last year I said that was
impossible and I am telling you that it is impossible now.
Is that because I have some magic pipeline insight into Cisco? No,
it is because I know the Law of Huge Numbers. A Robertson Stephens
study estimates that even if Cisco grew by 20% a year for the next
ten years, to $100 billion in sales and maintained a 15% operating
margin, an investor who bought the company today would earn only 3%
return per year.
That means Cisco would need to find an additional $80 BILLION dollars
in sales annually of routers and other electronic widgets to justify
its current price.
The problem is sales are not growing 30% or 20%. They dropped 32%
last quarter, and the company lost $268 million.
You simply cannot grow a $20 billion dollar company at 30% over a
decade, no matter how many companies you buy in order to try and
capture growth. That would mean your company would double and then
double again and then almost double again. Growing from $17 billion
to $100 billion in sales in ten years is simply impossible, unless
you do a lot of mergers, which then dilutes shareholder value.
Internal growth of that magnitude cannot happen absent a monopoly.
Now, if you start from $1 million or $10 million or even $100 million
it can be done. That happens all the time. We all dream of finding
the next Microsoft or Cisco. And some of us will. However, Cisco is
no longer the "next Cisco". It is the old Cisco at a very high price.
To make Chambers predictions come to pass, the market for his
products has to grow beyond anything predicted by anyone sane today
and all his competitors have to die.
I said it last year and I will say it again. Chambers is grossly
misleading the public and propping up his stock. The only difference
between Lay and Chambers is that Lay was involved in direct fraud.
The investors in Cisco will lose money just as surely as those of
Enron.
The day will come when his siren song will wear thin. People will
tire of hearing promises that cannot be met. When that day comes,
this stock will collapse to a realistic P/E ratio. Cisco will be seen
for what it is: a company in a maturing market that makes boxes that
look like the boxes it competitors make. Chambers will be replaced by
a CEO who will shoot straight, and then investors can once again
consider buying Cisco because it is a good company in a good business
with good products and people, and not because of some pie-in-the-sky
dream.
Today, however, it is a hyped-up stock with a 90 P/E ratio. It is a
company that plays very aggressive accounting games, which should not
be allowed even if they are currently legal. It is a company in a
maturing industry with strong competition. It is not unlike
automobile companies in the 20's, railroad companies in the 1880's,
or Xerox in the 60's. All had spectacular growth and promised to
continue that growth forever.
But trees cannot grow to the sky, and multi-billion dollar companies
cannot compound at 20% forever. |
