Once again, a very provocative TSC/Petrie article on CSCO, ASND and networkers
Top Stories: Cisco Grows Out of Its Networking Bellwether Role
thestreet.com
By Kevin Petrie
Staff Reporter
8/7/98 2:14 PM ET
Want an indicator for the computer-networking stocks? Don't
look at Cisco (CSCO:Nasdaq). Its days as the group's
bellwether are done, a result of its utter dominance of the
sector it represents.
Look at Wednesday morning, the day after Cisco released
strong fiscal fourth-quarter earnings. Cisco's stock bolted
higher, while its peers scattered indecisively amidst the
market tumult. Or look at what the stocks have done so far
this year -- Cisco is up 78%, compared with an average of
14% for six other major networkers. Noted analyst Bill Rabin
with J.P. Morgan tells clients Cisco is "the only true
core-portfolio holding" in computer networking. His firm is not
a Cisco underwriter.
It's curious, because people in the investing world routinely
throw around the bellwether label when referring to Cisco,
much as they do with Microsoft (MSFT:Nasdaq) and Dell
(DELL:Nasdaq).
Source: Baseline. Networkers include Ascend, Bay Networks, Cabletron,
Fore Systems, Newbridge and 3Com
But neither Dell nor Microsoft are group bellwethers either.
Starting in January 1996, Dell pulled away from other box
makers. Now its stock is about 25 times its former size,
while five other box makers are up 145%. Microsoft broke off
from its peers years ago.
While Dell, Mister Softee and Cisco may not be true
bellwethers for their sectors, the trio does at times give
bellwether hints about the overall market and more
specifically tech stocks. To be sure, bellwether indicators
are tough to read: This Group of Three has lapped the
market several times in the past few years. When others
turn south, they have held their own.
The reason for Cisco's change is simple -- it is thrashing its
peers. So what's good for Cisco is most often bad for 3Com
(COMS:Nasdaq), Bay Networks (BAY:NYSE), Cabletron
(CS:NYSE), Newbridge Networks (NN:NYSE) and others.
The trend is building.
Source: Baseline. Box makers include Apple, Compaq, Gateway,
Hewlett-Packard and IBM
"This year we gained more market share and momentum,
compared with our traditional competitors, than in any
previous year in the company's history," John Chambers,
Cisco's chief executive, said earlier this week in a
conference call. His statement stands out because he threw
his usual modesty out the door. And why not? Cisco claims
roughly 40% of sales in the entire data-networking market.
Another thing: Cisco continually says the overall networking
market has a long-term growth rate exceeding 30% in
healthy economies (Asia excepted, obviously). It's funny,
though, only Cisco consistently displays that growth rate.
There's one exception -- Ascend (ASND:Nasdaq), which
rules at furnishing carriers with large boxes that pump data
through the "core" of their network. And Ascend's stock has
outperformed Cisco's this year. But Ascend's success is
limited just to pockets of the industry, and the smart money
says Ascend's life as an independent company is limited as
well.
Money managers such as Bob Bender of Robert Bender &
Associates are still buying Cisco even with it trading at 99 a
share or 79 times trailing profits. Bender started
accumulating his position eight years ago; he also has a
longstanding stake in Ascend.
With Cisco no longer a bellwether for its group, it is in a
position to take on a new responsibility -- technology
bellwether, again much like Microsoft and Dell. The stock,
with a massive $102 billion market cap, comprises 9% of the
Nasdaq 100 index.
"I think that people are looking for leadership, and they're
finding it in Cisco," says one money manager who isn't
invested in the stock but asked not to be named.
"It's definitely a blue-chipper in tech-land," says one trader,
who also asked not to be named. "If you have a tech fund,
you have to own it. Period."
Cisco still is new in its role as technology moodmaker,
however. Analyst Spencer Hunter with Integral Capital
Partners notes that Cisco is so strong that it tends to pull
away from the market and leave other technology shares
behind. "There are many days when that whole corner of
your screen is red and Cisco is the only green," says
Hunter, whose firm owns Cisco.
The field, of course, is changing as computer networkers and
telephone suppliers like Lucent (LU:NYSE) attack each
other's markets and try to build converged data and voice
networks. Cisco intends to graft phone services on top of the
Internet devices it's been building for years -- a monumental
task, despite the hype, and one that will take time. In its
conference call Cisco said it claims less than one-tenth of
the future "converged" market. But for now, the Nasdaq can
look to Cisco as one of its technology sultans because of its
dominance of the computer-networking market.
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