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Cisco: An Internet Stock Made for Thinkers
By LAWRENCE M. FISHER
SAN FRANCISCO -- You can surf the World Wide Web without one bit of Microsoft code
on your desktop, or one bit of Netscape Communications, for that matter. You need never
venture near Yahoo, America Online or any other self-described portals. But every time you log on
to the Internet, you are touched by the products and technology of one company: Cisco Systems.
Wall Street knows, of course. The second-most active stock in
United States markets, Cisco has more than doubled in price this
year, making it the sixth-best performer on the Standard & Poor's
500-stock index.
And in a market that values money-losing Amazon.com at $15.1
billion and Yahoo at $21 billion, perhaps Cisco, with fiscal 1998
revenue of $8.5 billion and earnings of $1.4 billion, or 84 cents a
share, deserves its market cap of $142.8 billion.
Call it the thinking person's Internet stock. Sure, its market
capitalization is huge and its multiple rich, but this is a company with
real earnings from the Web right now. Nothing is as ubiquitous on the
Internet as Cisco's routers, specialized computers that manage data traffic on a network using the
Internet Protocol, known as IP.
More than 80 percent of the routers connected to the Internet are Cisco's. And if you believe that
the Internet will grow, and that Cisco's technology can remain competitive, then investing in Cisco is
not so scary after all.
Cisco has been hitting new highs in recent weeks and closed on another one Friday at $90.4375 on
NASDAQ. That is about 62 times the consensus earnings estimate of $1.47 a share for the
company for the fiscal year ending in July 1999. That multiple is more than twice the growth rate of
the consensus earnings estimate, so this is clearly an expensive stock.
But many technology analysts and fund managers say it is still a stock to own. Of 28 analysts
surveyed by First Call, which tracks earnings estimates, 16 rate it a strong buy, 10 a buy and 2 a
hold.
"Sure it's not cheap for any stock, but the growth rate has been phenomenal and should continue to
be phenomenal going forward as long as data traffic continues to grow," said Alec Murray, associate
director of research for MFS Investment Management, which owns 21 million Cisco shares in its
MFS family of mutual funds. "It's not a screaming buy here, but we think there is good upside
potential in the stock," he said.
The mainstay of Cisco's business is still routers, which perform the complex task of linking computer
systems that may speak different languages. But the company has also branched out to include
network switching devices, an alternative to routers, and remote-access servers, which let
employees in the field connect to the network.
Now Cisco is moving into equipment for telephone companies,
offering them the ability to add data traffic voice services.
"IP data is growing by 1,000 percent per year, tripling every three
months, and Cisco is the direct beneficiary of that," said Al Tobia, an
analyst with Nationsbanc Montgomery Securities. "The service
providers have to add more and more gear from companies like
Cisco." Tobia has a strong buy recommendation on Cisco, with a
12-month target price of $100. "There is certainly money to be
made," he said.
But it is possible to admire Cisco the company without
recommending the stock at the current price. Paul Saghawa, an
analyst with Sanford C. Bernstein, has a rather lonely "hold" on
Cisco, not because he dislikes it, but because he believes the current
multiple suggests a near-term growth rate that may not be
deliverable.
"If you ask me for a five-year picture, I believe Cisco will emerge as
a key supplier to the telecommunications industry," he said. "My
problem is 1999. In order to make the numbers the Street has
assigned, Cisco needs 35 percent top-line growth."
But what if Cisco does not dominate the next generation of the
Internet, when true broadband services become universal? Paul
Johnson, an analyst with BancBoston Robertson Stephens, is widely
known as the original Cisco bull, but even he notes that no industry
leader has maintained dominance from one technology leap to
another.
IBM dominated the mainframe computer business in the 60s, Digital Equipment the minicomputer in
the 70s, Microsoft the PC in the 80s and Cisco the network in the 90s. Who comes next?
"To own Cisco at this point, you have to believe they own that next big thing, and I'm not sure I
believe that," Johnson said. Still, he maintains a buy rating on Cisco, he said, because it is a
well-managed company that will continue to grow. "I don't spend a lot of time telling people to buy
Cisco, but I do recommend it and take credit for its going up," he said.
If you do believe in the next chapter of Cisco's story, how do you buy shares? Michael Murphy,
editor of California Technology Stock Letter, suggests dollar-cost averaging -- buying a fixed dollar
amount on a fixed schedule.
"They're always going to be expensive," he said. "If you wait to buy on a value basis, you will never
own Cisco." |
