Cisco Systems (CSCO) rules the technology that runs the Internet, but it’s got a few things to learn about product announcements. On March 9 the company held a teleconference staged with all the hoopla of Apple (AAPL) announcing a new iPhone. But then Cisco unveiled a new core carrier routing platform with the catchy name of CRS-3.
The stock actually dropped 26 cents a share the day after the teleconference.
I can understand the investor disappointment. The CRS-3 isn’t an iPhone-like consumer product.
But the CRS-3 is still huge news.
This could well be the core platform for the next video-and-data-heavy version of the Internet. The CRS-3, an upgrade for the 6-year-old CRS-1, offers three times the performance of the earlier platform at about the same price (and 12-times the performance of any current competing core router.) The new platform can handle 322 Terabits of data, video, whatever per second. AT&T (T), which took a turn at the teleconference, has tested it in the world’s first 100-Gigabit Internet backbone network between New Orleans and Miami.
Cisco has argued that the next version of the Internet will need the capacity to deliver video on demand and transmit high speed data and enable real-time teleconferencing at 100s of times today’s volume at 100’s of times today’s speed. The CRS-3, which Cisco says took $1.6 billion to develop, is the company’s bid to own that future.
The CRS-3 won’t show up on Cisco’s top or bottom line soon—it is scheduled to start to ship in the third quarter of calendar 2010—but I think it does assure Cisco’s continued dominance of the Internet equipment sector.
As of March 11, I’m leaving my target price for Cisco Systems at $29 by June 2010.
Full disclosure: I own shares of Cisco Systems in my personal portfolio.
From an end-user’s perspective, I’ll be looking forward to being able to download a movie from iTunes and actually be able to watch it that same evening! Should bode well for aapl revenues.
Jim – Thanks so much for sharing your great insights! I’m fairly new at investing–a little over a year–and have learned a great deal from reading Jubak’s alerts every trading day. I’ve also involved my children and they’ve learned to have a greater appreciation for investing their money instead of wasting it on every new video game that comes out. Take care.
How about “U-PHONE” Can anyone else see another tech bubble comming?
francolargo:
I agree that F5 is currently tough to justify. I think that it is one to put on a watch list when the correction comes.
FFIV could go down if tech stocks get hammered or there is a real or percieved decrease in capex. Since I’ve owned F5, those have been the 2 factors in pushing the price down. They could also drop if they have a delay in product launch. But coporate capex is probably the biggest trend to watch.
CSCO is dead money. It is well known that they like to hoard cash, pay no dividends and all the buy-backs are to cover the incredibly generous stock options to its executives. Investing in this company is like supporting Washington DC. Are we in charity business here? I must admit that I own some – though perpetually promised away via covered calls. But would not get anymore. There many more interesting stocks in Jim’s list.
AMT was a good idea, but overpriced at this time.
Another thing to remember guys: If a stock has too many buys/strong buys – dont you think it has already been overbought. Why the heck would it go up anymore? Wishing for more fools to buy who suddenly realized that it is a “strong buy”!! In short, never rely on yahoo and morningstar and S&P ratings. If you know about them, everyone else does too. If you decide to buy now, believe me there are “smarter” buyers who have already bought! Actually, if you buy know, the smarter ones are selling it to you…….. So stop loosing your money investing naively. OK – so now forget about AMT and find something smarter!
While Cisco’s protfoilo is awesome, Problem is cisco’s big customers i.e carriers are under huge price pressure. Networks are moving to IP, where revenue per byte is minimal, I dont see huge increase in carriers revenue anytime soon. At the same time increasing number of smartphone are putting pressure on their network for increase capacity. Without revenue growth carriers are not likely to go for super expensive top of the line cisco gear. Most telco’s are more likely to buy from huawei or ZTE not cisco or juniper.
This is reflected in growth rate, huawei & ZTE are growing around 30% YOY, cisco is growing 5% yoy (mostly from older cat65K), others like ALU are loosing market share.
I’ll pay for it! 🙂
Jim very good point. Being a tech guy I was mostly looking from that point, and I even missed the point that some businesses can use the extra speed even if and common person can’t.
From an investing point I’m still sort of the belief that we are looking an incremental to moderate growth, not huge growth at least not in the short term for the simple reason that putting a fast router in for $80,000 is one thing, but getting even a small part of that speed to the general public for a cost that they are willing to pay is a much slower operation.
Run26.2:
For FFIV, debt, profit margins, revenues, and growth all seem very much OK. But P/E of 43.5 and PEG of 2.78? How are they going to grow into such a lofty valuation?
Historical volatility of 34% and an almost perfect price graph: what would it take to drive any significant correction?
Christopher, interesting to put the CRS-3 announcement together with talk from Cisco and Google about getting into the Internet delivery business. Sure sounds like a shout-out to the existing Internet providers saying, “Hey, build out the high speed network or we will.” Granted all talk at this point but I expect Google at least to announce that it’s found a corporate or local government partner to sign on.
@ VSA –
Give this a try –
http://www.dailyfinance.com/portfolios
It is free through AOL. I have my watch list and portfolio on it. I find it very easy to use and to track my holdings with. There are better ones out there, but they get more cumbersome and harder to use the more powerful they become.
One internet company that did go up a bit on this announcment was F5 Networks (FFIV). They do internet traffic management and would be one to look at if we have a tech correction. At the moment they are not exactly cheap. I am long in F5 and have been very impressed with management.
Jim,
Ya really gotta give us an “Ignore” button…
Personally I’m sort oh hum on Cisco’s announcement. From the end user side, what is much more important is that last mile. As in the speed of their DSL/Cable/Cell (and of course the cost for that speed), and the reliability in the case of the Cell phone. For instance people talked about AT&T’s problem network for the iPhone, but that wasn’t a problem with the speed on the backbone, it was with enough cell towers.
From the stand point of a customer like AT&T it is much more about cost then speed. The CRS-3 is increasing the speed by 10x for something that is 6 years old. That is incremental not revolutionary. And if any given connection really doesn’t need the speed you can over come the speed problem by installing more units. So it is more about the fact that they can increase their capacity in the same space/cost with the CRS-3 where needed, but they certainly aren’t going to go and through out all their CRS-3’s to do it. It will be a much more targeted upgrade.
As for if say Juniper is that far behind. I doubt and I have even seen a post that they were in beta for a unit with similar speeds. Frankly I don’t even think it is much about what the other guy has. Companies seldom like to mix and match this kind of equipment, so they tend to pick a vendor and stick with them as long as the price/performance is close. Cisco is the top dog in this field and that gets them customers for no other reason. Just as when as my company they bought a product from Microsoft even though they knew there was a better product at lest cost from another company, they just didn’t want to explain to upper management why they wanted another company and take a risk they were wrong in the long run (like Microsoft driving the other company out of business).
Prior to the Tues. announcement CSCO calls were selling like hotcakes. News organizations were speculating that Cisco would introduce a new consumer ‘box’ that would integrate all of a home’s digital I/O at blazing speeds and challenge TiVo, be what AppleTV failed to be, and on and on… Then they roll out an $80,000 network appliance for customers like of AT&T. Oops. Talk about ‘Buy the rumor, sell the news!’ 🙂 Expect less hyperbole in the future. And relative to the replacement cycle, I doubt that CSCO is THAT far ahead of Juniper – though I’d appreciate hearing from a pro engineer on that.
mopama,
Yeah, I noticed a lot of buys on AMT. The First Call consensus had 4 strong buys, 6 buys, and 4 holds. S&P rated it 5 stars. Reuters at least gave it a “neutral”. I look at all that and think, “Someone was passing the crack pipe on Wall Street…”
Ed,
Agreed on your assessment even ROIC is low 5.34. Nevertheless is rated a BUY with a price target of $50: http://www.marketwatch.com/investing/stock/AMT/analystestimates?subview=snapshot&pg=analyst
It is also my understanding that it operates in a market with high entry barriers positioned to benefit from it. I’ll research more and I’ll inform you if I’ill find some other stock(s) within the same field.
Mopama,
I agree with Ed….that stock has been overpriced for quite some time now. I remember looking at it in early/mid 2008 and it was overpriced then as well.
mopama,
AMT has some godawful ugly financials.
Debt/equity: 1.27
ROI: 2.98
P/E: 73
PEG: 2.53
Pick a number. It’s all ugly.
Thanks for the info catengineer.. i am really liking the functionality of morningstar!
After taking a look at Cisco, I think it’s fairly priced now. I don’t really see it moving much from where it is.
One thing Jim said struck me: “The CRS-3, an upgrade for the 6-year-old CRS-1, offers three times the performance of the earlier platform at about the same price…” At about the same price?! In other words, don’t expect huge profits from it (although they might generate higher sales over a short period of time after it’s release). Then what?
Having said all that, I will say I like Cisco, the company. But I also like Walmart, the company. But I don’t want to own either of their stocks.
Yeah I think Cisco over did their pre-announcement (after all even if the speed was there today the world of the internet really wouldn’t have changed that much), but I don’t see how investors were disappointed. I think more like they got about what they expected. After all the retreat in price has been only 1/3 of the increase in price after the pre-announcement, and some of that could be attributed to just general stock market movement.
Ed,
I was thinking about data transmission. Cisco is one investment opportunity and it is great. What about wireless and broadcast communications infrastructure i.e. AMT. In your opinion is this a good play into the foreseeable future? It owns approx. 20,000 towers in the United States and 7,000 towers in Mexico, Brazil and India.
Sorry HTML tags work but don’t get you the link: here’s the raw URL address – http://llinlithgow.com/bizzX/2010/02/mobility_the_4as_and_cisco_an.html
Cisco did a wonderful job saving itself from the dotbust, maintaining presence in enterprise datacom and going after carriers. This box is a carrier product and Cisco while they’re still got mainstay business in core datacom. The questions are where are they going and what’s it going to be worth. Their last major analyst presentation was as good a picture of the strategic future as I’ve seen and the pitches are downloadable. The problem they’ve got may be Red Queen Syndrome – running harder and harder to stay in place while they get bigger and bigger and harder to manage. If you want a summary of the several pitches try this:
Mobility, the 4As, and Cisco: an Anti-sclerotic Exemplar?
I like CSCO and feel at though I understand all the favorable short/long term fundamentals that work in its favor. The company has done just about everything right since the dotcom bust, revenues and earnings are up roughly 300% from 2002. That being said, equity investors have a fist full of nothing to show for it. What gives? And why should this next cycle be different?
VSA,
Try morningstar.com. They have some pretty useful tools for the free membership. I think you might find what you’re looking for.
Sorry, this comment is not related to the post at all. I just wanted to know if anyone knows about a good free website where I can create my stock portfolio, and see how I am doing over a period of time. I am interested in seeing how I did in comparison to the market, what my monthly growth has been etc.
I have portfolios in yahoo, scottrade and interactivebrokers, but none of them is offering a comprehensive analysis of my picks and investment strategy. Any comments are welcome!
Jim,
I’d rather own the CRS-3 than Cisco. That’s not a knock on Cisco either. I mean I REALLY want the CRS-3!
Sorry, is my tech geek side showing? 😛
great pick, Jim.
Arguably, there may be no better company to own for the short and long term.
Any thoughts on DGW from watch list?