Optical/IP Networks

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

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