CSCO isn't as valuable as ATHM. In fact, it will be very difficult for CSCO over the long term to keep up with ELNK if ELNK remains independent. As an aside I believe the synergies exist such that ELNK will merge with ATHM.
Be that as it may, CSCO is a maker of hardware and it is notoriously difficult to retain an ever growing earnings stream under ever growing scale. It is almost sure that when the growth in earnings are no longer proportionate to scale that the weight of the aging previously built scale comes to bear and pulls your profitability to negative.
Service orientation circumvents hardware's swings, but at a gross margin concession. Surety of return creates an environment which narrows profitability, so ATHM's valuation is mostly based on the long term conviction of surety of return rather than magnitude.
Your figures support the conclusion that CSCO is slowing just when 50 expert analysts have decisively stated the company will continue on their growth track. These analysts reached this consensus about 2/3 through CSCO's upside move about five months ago when the stock was about 70. This is what happened with IBM in 1986, and 3 Q's later, the analysts suddenly changed their collective minds. If it can happen to IBM, it can anywhere in hardware. If that model is applicable to CSCO then CSCO is essentially topping and will formally hit the skids in 4 months.
Similar to this kind of economic law is the reality that to continue linear growth in stock price, retain the trend, requires geometrical growth in earnings. That's why sequential quarter earnings comparisons are the important analysis to make assuming clean balance sheet. This is a growth stock axiom. The price to sales ratio has become chic in this era since so few hopefuls have earnings, but it isn't a good measure. Assuming a company is bringing it down to the bottom line at whatever margin, the better measure is expected PE as a % of growth rate with 100% as fully valued. This measure implies MSFT is way over valued, but starts getting OK at about 60 assuming ceteris paribus.
ATHM can hold its current price even if they only linearly continue the upgrade. The reason they can get this exemption from economic law is found in goodwill. There is practically no one who isn't pulling for ATHM. Steve Case wants the service to his house. He may want it with a different name attached, but ATHM is generic, the brand, the coke of the Pepsi War. You also could look at this from the perspective of how expectations support extreme multiples. Never fear, just consider how intense is the desire to get away from the snail? |
