Umm ... yeah, I'm saying the current price is roughly right for CSCO at this time -- i.e., any dramatic runup from here would be emotion-driven, rather than valuation-driven.
I ran some figures based on an annualized earnings growth rate of 30% to 50% and a trailing 12-month P/E of 60, and came up with a stock price for CSCO of between 130 and 160 (not adjusted for the split announced today) by the end of 2000. Now that's not all that bad; and I suppose one could argue that CSCO will have a higher than 60 12-month trailing P/E at that time. But it seems at least as likely to me that CSCO will have a lower than 60 trailing P/E at that time, for reasons having more to do with market psychology, interest rates, and the state of the global economy than anything specific to CSCO and its prospects. CSCO's recent P/E's have been high even by CSCO's standards. There is no natural law that prevents them from dropping back a bit closer to their historical range, even while CSCO continues to enjoy great success. CSCO's price at the end of 2000 could easily be the same as what it closed at today, even if things go pretty well for CSCO in the interim. I'm actually a bit more optimistic than that, but it strikes me as clearly within the range of plausible outcomes.
So I'm almost neutral on CSCO's price at this time. I'm hanging on to my current position, and consider it a good investment. If CSCO bumps up into the 125-140 range in the near future, I'll be lightening up a bit. If CSCO drops below 100, I'll be picking up more. In the short and medium term, sentiment rules, and that's pretty hard to call. Look, if they'd only change their name to Cisco.com, the stock would go to 160 overnight.
An open question for those of you who believe my more optimistic projection (160 by the end of 2000) is way too pessimistic: do you base this on a belief that CSCO will grow earnings at an annualized rate of over 50%, or do you believe that CSCO's P/E will continue to increase? Hint: the laws of mathematics mean it has to be one or the other, or some combination. |
