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Optical/IP

Is Cisco Spread Too Thinly?

Cisco Systems Inc. (Nasdaq: CSCO) shareholders sometimes get frustrated that the stock doesn't move much.

Well, it moved: Cisco's stock dropped 20 percent in November after a scary earnings report, and it's been slow to recover in the weeks since. What might be even more frustrating to Cisco shareholders is that Juniper Networks Inc. (NYSE: JNPR) keeps climbing: up 37 percent in the past year. (See Is Cisco's Q1 Contagious?)

It makes one wonder what it is about Cisco that seems to keep the share price down. Even before the November blowup, Cisco shares traded at US$24.49, about even with their January 2010 level.

Scott Raynovich, former Light Reading editor-in-chief and an employee of our parent company, UBM TechWeb, suggests the problem is that Cisco is spread too thinly, expanding into too many adjacent areas.

"It's becoming increasingly evident that while Cisco was out buying Flip video cameras and expensive set-top boxes, it should have been more heavily involved in emerging virtualization and cloud infrastructure stories," Raynovich wrote on Enterprise Efficiency. (See Cisco's Latest Buy: Flippin' Sweet.)

That point could be particularly relevant this week, as Cisco is preparing what looks like a consumer TV announcement. This promotional video, linked to Wednesday's press conference, hints at ways to bring Internet content to analog television sets.



Simon Leopold, an analyst with Morgan Keegan & Company Inc. , isn't so worried about Cisco spreading out. He still believes in the ability of the adjacent investments to tie back to switches and routers, Cisco's central business.

"If more people are buying Flip cameras and uploading Flip videos -- and I'm using Flip because it's a good example of 'why the hell did they buy that?' -- it drives the sale of switches and routers," he says. "You may debate whether or not Cisco needs to be in it, but it drives the core business."

What's got investors more concerned, he thinks, is Cisco's market share.

"There's a lot of sentiment that Cisco is losing market share left and right," Leopold says. "I think the truth is, they've lost market share to Riverbed Technology and F5 Networks, and in every other segment they're playing in, they're gaining or holding steady."

And the WAN acceleration area, where F5 Networks Inc. (Nasdaq: FFIV) and Riverbed Technology Inc. (Nasdaq: RVBD) are taking share, represents just 3 percent of Cisco's $41 billion-a-year business. That's an important market, Leopold says, "and Cisco should be doing much better, but let's put it in context."

Analyst Ed Zabitsky of ACI Research thinks Cisco got unfairly pounded after its October surprise. While it's true that Cisco's set-top problems aren't shared by the industry (it's more a matter of cable companies starting to break the duopoly of Motorola and Cisco's Scientific Atlanta), its other troubles, such as slower spending by government, are probably universal, he figures.

— Craig Matsumoto, West Coast Editor, Light Reading

optiwizard 12/5/2012 | 5:16:14 PM
re: Is Cisco Spread Too Thinly?

The problem is that CISCO is getting too big. They are trying to do everything and at they are not focussed anymore. They want to be everywhere, in the home network (dixit Chambers), with the telecom operators, in the smart grid, with all th enterprises, ...


A lot of customers start to hate CISCO. Why ? CISCO is just milking them every year with new software updates without any customer value. The total OPEX cost of the installations is by far exceeding the CAPEX that the customer paid at the installation. Their management software (read DOS like editing mechanism) is a nightmare. It is time to say goodbye to this big company and to split CISCO again, just like Motorola is doing right now, that is the only way to generate new shareholder value and to get satisfied customers back again.

upand2theright 12/5/2012 | 5:16:12 PM
re: Is Cisco Spread Too Thinly?

It's gets harder and harder to say that the Cisco consumer business moves carrier router and switch business.  I have seen no Wall Street numbers to show that this is the case.

paolo.franzoi 12/5/2012 | 5:16:11 PM
re: Is Cisco Spread Too Thinly?

 


Why would anybody expect that a company the size of Cisco is a high growth machine?  They have a very good business with a large mix of different markets that they address.  But stock is based around (at least from a value model) EPS growth.  Cisco has two huge issues with this.  First, they have too many outstanding shares.  Second, they have lots of legacy businesses.  They are a lot more like Proctor and Gamble at this point then they are a high tech startup.


Can you find individual markets that they are losing in?  Yes, I am quite sure they are losing in more than the analyst talked about.  But in a way that gives away who I am (from who has heard me give this little diatribe)...this is why you never invest in technology companies.  Cisco's PEG should be no higher than PGs or CATs or CPB.  If you as an investor don't understand that, then there is something really wrong with you.


I used to work (seemingly a billion years ago) for Racal (yes the company that founded Vodaphone).  They had a model where when it worked they did a real good job with it.  They bought and repaired or milked many businesses.  When they were done with a repair job they relaunched it as a new stock and issued shares in the new company (most of course to the existing shareholders).  Thus, the shareholders got to manage their portfolio more directly and could change their share mix model buy investing in the separate companies.  The milked companies were discarded to PE after they were sucked dry.  Then, they invested or started new businesses.


This eventually failed but could be something that you could do with chunks of Cisco (for example Linksys if it has better value now).


seven


 

Silver-Peak 12/5/2012 | 5:16:11 PM
re: Is Cisco Spread Too Thinly?

Silver Peak is also challenging Cisco in the WAN optimziation space.  Check out the latest Magic Quadrant for WAN Optimziation here.

Pete Baldwin 12/5/2012 | 5:16:10 PM
re: Is Cisco Spread Too Thinly?

Good thing we ran this headline before CES. With this Videoscape thing, Cisco's come up with an explanation why lots of these different pieces can come together:


http://www.lightreading.com/document.asp?doc_id=202705&site=lr_cable&

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