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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Bicycle who wrote (53246)	5/21/2001 12:00:27 PM
From: Stock Farmer	Read Replies (3) \| Respond to of 77398

Hi FD "we must be prepared for some inaccuracy" Precisely. Uh... ok, close enough. LOL. As to extrapolating past performance into the future, this works. On the fundamental premise that the underlying business model remains unchanged. But I think we saw a profound change in Cisco's business model. Indeed, I remarked on it during my analysis of FY '00 results last year. Back then it occurred to me that Cisco had hit the point of neutral marginal return on growth in FY '99 (cost of a dollar of incremental actual operating cash flow exceeds a dollar), and that a fundamental shift of the business model had taken place. I suggested that this was not noticeable externally because the non-operating parts of the business were providing a flood of cash flow. Even a chimpanzee could make money in the NASD during FY's 99/00 and CSCO probably had brighter folks than apes at the helm of their investing activity. The first national bank of CSCO was also quite profitable, churning more cash into the business in '99/00 than the operating arm had generated in the same period plus all prior history. But the basis of this cash subsidy has evaporated. Or at least we now know it is unreliable... apparently it is returning somewhat as I type, to be with us for an indeterminate period of time... but one can not run the business as though it will be in an external bubble forever. The Executive team at Cisco appears to know this too. You can see telegraphed hinting of this in their response. Is this a "temporary" blip in demand, to be all right as rain in the next quarters? If so, why lay off with 6 months severance? Better to send everyone on a six month paid vacation so that they could be back when business picks up. Oops... very high probability that it's not picking up in six months. That's the message we don't want to hear. How about acquisitions? Why not keep the growth machine pumping now that the crop of Cisco kibble is flopping around, desperate for financing? Because growth is imprudent. That's another message we want to deny. Summary: the business model has changed, and it passed through an inflection point that was masked in the noise of the stock market bubble. I suspect that we will see a new trajectory for the business as the recovery stabilizes. This is why I am hesitant to extrapolate any of the past ratios onto the future business. I suspect that instead of looking backwards and saying "well, in '97 the PE was x so in 2002 it should be x" we should be saying "what should the PE be if we started from scratch". Or similarly, for whatever key valuation metric suits your fancy. What this means for investors is that we must go through a period of intense speculation because there is no roadmap to follow. The company is providing very little guidance. Those of us trying to divine the future as "investors" are guessing really. We are going to be wrong. Similarly, those of us extrapolating straight forward from the past direction... well, this will be wrong too I am afraid. The business has turned. The question is by how much. If I had to place a bet for the long term (and I have), I would guess that a larger company will grow less quickly than a small company, and that CSCO might operationally take a similar place in the GDP as IBM currently occupies, some 5-10 years down the road. I also believe that the desirability of a pure "growth stock" now is much higher than it will be as the retiring boomers begin to dominate. With so many billions of shares, I am doubtful that Cisco will ever be able to declare a meaningful dividend. This suggests a stock price closer to $10 than $30 in present value. Others are placing bets closer to the previous trajectory, which is nearer and dearer to our hearts. It also is nicer on our pocket books and has a better psychological feel to it. So I think that we will see short term exuberant speculation dominate short term pessimistic speculation, and we will drive prices forward because there will be no real guidance forthcoming. And hope is stronger than fear. I would not be surprised at all for a short term run in the price - possibly by another 50% or so (to the delight of everyone, I am sure)... where "short" is relative to the time between now and 2005. But I also would not be surprised if the sobering reality of a slashing cut in staff and a brake-pad-squealing halt of the fundamental growth strategy shows up as an unpleasant speed bump in the just-longer-than-short term. Creating a run of the most unenjoyable kind. Food for thought. John.