Hi all, I think a tsunami is coming and it will start this year and lead into a great 2003. Here's my thought process. There are several events unfolding that will lead directly to a boatload of spending on networking equipment that will also directly impact Cisco topline growth and surprise many naysayers as 30% growth becomes again easily achievable. Here's what's happening and it shouldn't be a surprise to anyone that has been watching this stuff.
I've already talked a little bit about the Technet lobby and how Daschle and Bush are falling all over themselves to be the first to lead the broadband push for 100 million households by 2010. That's the first leg of the new networking bull, as the government deregulates to help make broadband easier to deploy, cheaper for the end consumer, and gives tax incentives to businesses to make it happen.
In addition, 2002 is a momentous year. Why? It's the year that Blockbuster's contract with Hollywood is up for renegotiation (http://www.instat.com/infoalert/2001/alrt2001-27.htm). That's the second leg of the new networking bull. Blockbuster is about to find itself in a world of hurt as their market's very foundations get challenged. I believe this year they will find themselves very much less profitable as their margins get pressured by the large movie houses, who have plans to make an end run around Blockbuster.
Another interesting development is an increasingly well publicized effort by Sony Corp. (SNE), Warner Bros. Pictures, Metro-Goldwyn-Mayer Inc., Paramount Pictures and Universal Studios, called Moviefly. You can guess what that is. Yep, downloadable movies for a price. True video on demand, not that crap you get on cable TV. If this doesn't impress you, then let me regale you with a little known fact about the impact of video on internet bandwidth demand. A litle while ago, when Napster was in its prime, 1/3 of all internet traffic was generated by the peer to peer consumption of bandwidth caused by Napster music downloads and uploads. Let me repeat that: ONE THIRD OF ALL INTERNET TRAFFIC CAUSED BY NAPSTER IN ITS PRIME. Movie downloads and uploads are on average one to two orders of magnitude larger than music files. America is steeped in Blockbuster culture. With Moviefly, it begins, and within a decade Blockbuster is history or is no longer something we recognize today. That's the third leg of the new networking bull.
Lastly, demand goes from merely doubling every year to soaring this year and goes geometric for at least the next 5 years, but most probably for 10 years. Said another way to really help it sink in: cheap digital video on demand will cause a hockystick in bandwidth demand. This will spawn a new networking revolution as equipment makers scramble to fill demand by service providers for their networking boxes to light all that unused fiber which will rapidly reach capacity within a decade. That's the fourth leg of the new networking bull.
The new networking bull is now standing on all four legs and is ready to start on a tear, which will bring us some incredible growth again. Which company stands to gain the most from this new networking bull? You guessed it: Cisco. When this new bull reaches its stride, all of our friendly thread bears who think Chambers is an idiot will range from surprised to unpleasantly shocked as they watch Cisco grow topline 30% again. But how is it possible for a company that large to grow that fast, they will query? Very simple, I'll answer. It's Americans' love affair with Hollywood for starters.
You don't have to believe me, but I think the above scenario is not just rosy fancy. I think it is simply inevitable. My timing may be off by a year, maybe two, but if Moviefly launches this year as planned, followed by copycats from Disney and others, and if Bush or Daschle can do something to truly help break the last mile bottleneck. Then bandwidth demand will be insatiable and that will benefit Cisco most. In fact, I don't even think Daschle or Bush have to do squat. Economics will do it for them. You see, video on demand is the killer application that will break the chicken or egg syndrome of broadband Internet access. We'll watch as DSL falls way behind, because of slow deploy, and Cable reigns supreme because of fast deploy. Many, many people who didn't think broadband was worth it before, will buy it just to be able to download movies. Of course, there are many questions. Pricing for one. If they come out with pricing that doesn't offer a savings over Blockbuster, that might stifle a little demand. But eventually they'll get it right.
Anyway, John Shannon and others will say, well, Cisco stock still won't be worth the money. However, when revenues start rising rapidly again, people will overlook small earnings as they focus on revenues, which means PE inflation continues. In other words, the stock will rise as revenues and cash and equivalents rise, not as earnings do. That means we could see $40 within the next 3-4 years. Based on DCF valuation, Cisco may not be worth it, but based on dramatic topline growth, people will bid the stock price up. There you have it. I am going to start looking for an entry point. I'm still hoping to get some more shares below $15 sometime in April. We'll see.
All of the above could be just another one of my flights of fancy. Or maybe it isn't. I'm betting it isn't, but you shouldn't do anything without doing your own due diligence. In other words, don't sue me if I'm wrong. We're all adults and should exercise good judgement in coming to our own conclusions before making any decisions that involve our own money. :) Good luck all and do your own homework. |
