Hi John,
I did follow your tenacious and generously motivated, but possibly under-appreciated debate on the CSCO thread. I might note that the audience only wants to hear what they want to hear and only wants to believe what they already believe, because they want to, without realizing one truth, and that is, when the market needs to go down, CSCO will go along without a fuss. The market needs to go down, so as to unwind, relax, defecate, cleanse, sober up, take in nutrients, and then revive.
The demerits and merits of CSCO can be debated till the bear comes back to the den. You know, along the lines of market size, growth, price points, competition, industry structure, technology, product cycle, valuation, etc.
The troubling fact about CSCO is that there is nothing innately complicated about the boxes, for a company operating in a cyclical and already highly competitive market, with no particular barriers to entry, and more competitions on the way, visible and still invisible. I have already seen little Asian companies making small enterprise suitable boxes that look very much like the CSCO products of 3-5 years ago. Well, like I said, as an electrical engineer, there is nothing magical about the boxes, just as there is nothing magical about voice telecom switch boxes. I have seen large factories out here churning out yesteryears technologies. The catch up will be rapid, much more so than more complicated endeavors such as auto assembly and such.
The nature of all box-making enterprise is …
(1) heavy R and D
(2) simple to emulate and reverse engineer
(3) patents meaningless as there are too many ways to achieve the same product features
(4) short product cycle
(5) manufacturing cost is paramount
(6) sales price keeps dropping
(7) inventory depreciates rapidly
(8) market saturation rapid and / or competition saturation rapid
(9) lead position not possible unless industry standard based monopoly realized and not destroyed by government fiat
CSCO may not go down in a ball of flames as Lucent did, it may very well die a death of 1000 nibbles. Investing in growth without real economic return will be tiring, and in a less generous financial market, valuation will unwind, based on free cash flow and prospects in maintaining that free cash flow.
CSCO should have acquired MO or KO when they had the chance.
Besides company/industry specific issues, I think it is entirely possible, if we are collectively lucky, that the equity market indices stay range bound as the excesses are rung out of the financial system, and if we are unlucky, a sudden unwinding.
Bottom line, CSCO is just another normal company, not in the same league as KO, and yet grossly over-valued by all tradition pre-mania valuation methods. The risk reward of CSCO is simply wrong for responsible parents and real investors, as opposed to gamblers and traders. There is nothing wrong with gambling, as long as allocation percentage is under control.
The major difficulty I have with many stock specific discussions is that the most important context is not transparent to the reader – allocation percentage.
In the mean time, no point arguing about it while we refuse to buy into the fairy tale. Our point can be made much more convincingly and palatably when CSCO price comes down a notch or two, to say, $8/shr, and even then, a so-so buy, until the broader financial environment improves. Just as Buffet voiced “there is no value …”.
I am definitely in favor of speculating in new technologies and imaginative Wall Street spins, but only when they are genuinely new. Stories of CSCO’s prowess is old and tired, and as interesting as three days old pizza. The only thing new and interesting about CSCO is that its price can go down, as well as up, and no longer always up.
Chugs, Jay |
