This is another letter which I think is good, I would like people to take academic advantage emphasis is on 'academic' don't trade these recommendations if you are not aware of risks associated with the stradles highlighted in this letter but it gives you an indication of long term growth potetial.. of this and get it even to learn the various kinds of trades highlighted here, I would be very very clear- selling puts and buying calls is very very risky- for me it only helps to understand undercurrents in the market. a PM has sent me a message that how people can make money by shorting in a bull market, remaining in cash for me markets are about playing them - if you want to sure about your money and have been in cash for last donkey number of months I think the right place is short term deposits at 3% or even lower- market means risk it entails risk and therefore it is always good to able to invest in right stuff solid stuff..
This letter was introduced to me by a regular reader of this thread for who I have great respect-
From: JArena3773@aol.comAdd to Address Book
Date: Mon, 23 Nov 1998 00:08:12 EST
Subject: THE HIGH TECH ARENA 11/23/98
Update: Cisco Systems
By Joe Arena
Editor
The High Tech Arena 11/23/98
Over the past few years, we have reiterated our assertion that not
owning
Cisco Systems would be like not owning the leading railroad stocks in
the 19th
century. In addition, we continue to focus on the prolific growth
potential
of the Internet by citing such facts as a.) The Internet gains 7 new
users
every second, which equates to 220 million per year. b.) Only 3% of
the
global population currently has access to the Internet. c.) Half the
world's
population has never made a telephone call. Given the dominant
position that
Cisco has in terms of building the Internet, it remains our best idea,
and as
company and industry trends unfold, the reasons to overweight the stock
in a
portfolio become more compelling.
The carrier market, which represents a $300 billion opportunity for
Cisco,
provides the greatest potential for revenue growth, and is the single
most
important reason to own Cisco. Regardless of what happens in the short
run in
terms of capital spending, Y2K issues, or other macroeconomic factors,
this
market potential is not going to change significantly. This market is
comprised of ISP's (Internet Service Providers), CLEC's, (Competitive
Local
Exchange Carriers), and LEC's, or Local Exchange Carriers. By 2002,
depending
on the execution of Cisco's acquisition strategy and the strategic
alliances
it forms, a case can be made for Cisco garnering $40-$50 billion of
this.
Almost certainly, the carrier market, which accounts for about 30% of
Cisco's
business today, will be the company's primary source of revenue two
years from
now.
This forecast represents the best case scenario over the next few
years.
More realistically, incremental revenue of about $20 billion by 2002
seems
probable. This revenue mix in terms of applications could be broken out
as
follows: a.) Packetized Data $3 billion (remember, the business is
transitioning from Circuit Switching to Packet Switching, playing to
Cisco's
core competency versus Lucent's expertise in Circuit)
b.) Multi Service Platforms, $3 billion c.) Access $3 billion d.)
Voice
Systems $11 billion. (Recent acquisitions of Summa Four and Lightspeed
have
already begun to address this opportunity) Given this, it is not
difficult to
project Cisco revenue of around $30 billion by 2002, which would be
more than
triple sales of $8.4 billion in fiscal 1998. With this dramatic rate of
growth, it is also not inconceivable for Cisco to trade at twice its
rate of
earnings growth, or 55 to 60 times forward earnings.
One of the keys to Cisco's success has been their acquisition
strategy, and
we continue to be impressed with their execution in this area. Despite
how
large a company Cisco has become, they have been able to retain an
entrepreneurial culture while assimilating these acquisitions and
achieving
synergies. Maintaining such a culture is crucial if Cisco is to
continue its
proactive approach to reinventing itself in the rapidly evolving
networking
business. Although our assessment of this aspect of Cisco's business is
admittedly a subjective one, there is also a quantitative measure of
Cisco's
adroit style of managing their acquisition strategy. The bottom line
here is
that the company has been able to retain more than 90% of employees from
acquired companies. This number is exemplary when compared to the
industry
average of 20-30%, and is an excellent indicator of just how
judiciously Cisco
pursues this strategy.
Despite the many new revenue streams which will drive Cisco's growth,
the
current state of their core router business cannot be ignored in any
analysis
of the company. In the most recent quarter (ended September), the
router
market grew 8% sequentially and 13% versus last year's third quarter,
which
equates to roughly $1.5 billion, according to The Dell ' Oro Group.
Cisco
continued to gain share, growing to 67% market share, which is up from
65% in
the prior quarter. To put this in perspective, Bay (recently acquired
by
Nortel) has a 12% share. In the low end of the router business,
Cisco's share
is even greater, in the 70% range. Another aspect of this business
which is
important to watch is average selling prices, which were flat
sequentially for
the quarter. Versus the quarter last year, average selling prices
declined
5%, underscoring the commoditization of this business. This also
magnifies
the importance of Cisco's strategy to provide end to end solutions,
leverage
their installed base, and increase penetration of their proprietary IOS
Software. Without these advantages to differentiate them from the
competition, it is doubtful they would be able to maintain their
dominant
market share. (is it any wonder that Cisco is already appearing on the
DOJ
radar screen)?
However, Cisco is not dominating every segment of the business. It is
noteworthy that Ascend has now taken the number one position in the
rapidly
growing Remote Access market. In the September quarter, Ascend grew
their
share by four points to 29%. Cisco is now second in this business with
a 28%
share, 3 COM is third with 25%. Overall, the Remote Access market grew
8%
sequentially in the quarter, and was worth about $600 million for the
quarter
according to The Dell ' Oro Group.
From an investing standpoint, we remain long Cisco since taking a
position
in May have 1996, (at an average cost of 24.6) and also have a position
in the
01 56.6 Leaps which is four times that of our position in the stock.
(with an
average cost of 19.6) From a trading standpoint, our best idea this
year was
to short (TXN) Texas Instruments 2000 puts, and use the premiums to add
to our
position in the Cisco Leaps. For those who have followed this trade
from its
inception in June, the appreciation of both Cisco and Texas Instruments
in the
past five months has turned $0 into $9300 for every ten contracts of
TXN puts
shorted.
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DISCLAIMER: The information herein has been obtained from sources
which are
believed to be reliable, but there are no guarantees as to its
accuracy or completeness. Neither the information nor any opinion
expressed constitutes a solicitation for the purchase or sale of any
security.
THE HIGH TECH ARENA
Joe Arena
Editor
JRArena@aol.com |
