Hi Joe -- Thanks for your post. I agree with you in some places, but strongly disagree in others ...
First and foremost, it is very important for you and all COMS investors to realize that CSCO is very much a direct competitor of 3Com. 50%+ of COMS total business are products where Cisco has a directly competing product. Almost any "3Com Systems" product has a direct competitor from CSCO. COMS "competing at the edge" is more rhetoric than fact. CSCO does not play in the low-end modem market and NIC market. But almost all of 3Com's other product segments (LAN Switching, L3 switching, remote access servers, access devices, etc., etc., etc., ) all compete against Cisco. I hate to say it ... but you're fooling yourself if you think otherwise. Anyone on this thread here work for COMS? Would any of you say that your company does not compete against Cisco? This point is very fundamental to understanding this industry.
3Com does indeed have the strongest channel presence among the networkers. Cisco used to not play at all in the channel, and go almost all direct. Last quarter, Cisco disclosed that it had done more around $3 billion in channel busines over the last year. Now, since alot of 3Com's channel business comes from NICs and modems, where Cisco does not play, than if you look at the numbers, Cisco does the same or more systems business in the channel over 3Com. the fact that Cisco has come from next to nothing to comparable channel presence is not a upside for 3Com.
Online sales: You do't quite understand the concept here. Direct sales in enterprise networking does not equal online sales. In large part, online sales systems are essentially an efficient mechanism for processing orders that sales reps win -- especially in larger enterprise accounts and ISPs. Of course, 3Com does have a direct sales force. They are just drastically outnumbered, and as a whole have much less experience. Add a lot of Cisco incumbancy control, and 3Com is in a second or third fiddle position. This kind of position will effect their growth prospects. Their growth prospects will be measured against indsutry growth. I don't believe COMS can keep up the pace -- granted it is a insane and unrealistic pace.
COMS does try to compete in the enterprise space. Trust me. They are stronger in the Small-to-Medium business sector, where they have dominated. But .... again, Cisco now competes head-to-head in this space, has just disclosed that they have done more than $2 billion over the past year in this segment. Again, this is not good news for 3Com and has and will impact their stock.
COMS will never play in the SP/telco core ... we agree there. Problem is, with the advent of converged networks, there is a HUGE growth opportunity here that justifies some of the huge valuations in this industry. 3Com can't earn a premium because it can't play ... it must partner. Partnerships are only as good as the next acquisition.
(By the way, Cisco acquired an internet telephony company called Selsius. They compete directly with 3Com here as well ....)
I'm sure you would be fine with 30% growth with 3Com ... you won't see it anytime soon. In regards to your point on low-end LAN Switching. 3Com has slipped from high 30s market share (1997) to mid-20s and a tight race with Cisco and Bay/Nortel (who came from close to 0). 3Com is good at manufacturing low-cost products, but they still sacrifice margin to win deals. 3Com operates at about 46%GM. Cisco is 65%. if you look at the low-end switching market, Cisco's prices are actually a little bit lower than 3Com. So who is the expert at low-cost manufacturing?
So where do we agree? I'm not sure how Cisco is in getting into the low-margin home networking market. They've announced that they will partner, and not market their own products. Cisco's P/E is indeed high, but you really have to understand the future implications of convverged networks. Cisco only needs to win a small percentage of the potential new market to justify its high valuation. COMS doesn't command this because they don't play in the market segments that really matter. The enterprise market is indeed slowing, and this is more of a problem for 3Com, who sells a lot into this market. Cisco sells more, but they are able to offset it with their ISP/telco business, which is growing over 100%.
So to summarize -- I compare the two stocks because they are very much direct competitors, regardless of what Eric B. tells the press. Just take a quick look at the markets 3Com is in. I believe that Cisco is a better long term buy than COMS today, in large part because of the reasons I just blabbed about here. I think you're smart to hold both COMS and CSCO. I am not negative on COMS ... I'm just not overly positive. I think you can make money longterm with COMS, but that your money could go a lot farther in other places, like CSCO, LU, etc.
IMO, of course. |
