Following Cisco's (
) earnings release, traders lopped 16% off of its share price as a
result of lower revenue guidance going into next year. Cisco
competes with Juniper (
), Alcatel-Lucent (
) and Tellabs (
) in the routing and switching businesses.
The plunge led to fears that the tech sector is stalling, which
we feel is unjustified at this point though we acknowledge the
slowdown in public spending is concerning.
However we feel that major trends benefit Cisco such as the
proliferation of digital content and the shift to cloud computing.
We maintain our optimistic view on Cisco's medium to long-term
prospects and keep
our price estimate of $24.04
, which is around 25% ahead of current market levels.
Public Spending Concerns
Cisco's drop sent off alarm bells. This was the biggest drop in
Cisco's stock since 1994 and was primarily triggered by concerns
surrounding a slowdown in public spending.
Facing budget deficits, the US, Japan and some Central European
countries have reduced their IT spending more than expected. As the
economic recovery continues to be sluggish and governments are
burdened with debt, Cisco will face short-term challenges in terms
of its share in switches and router market.
If its market share drops from our current estimates of 72%
through the forecast period to 66%, this reduces our estimate by
Explosion in Consumer Digital Content
The company estimates that internet traffic will increase more
than four-fold by 2014, amounting to 64 exabytes per month. This
will inevitably require better networks including routers and
switches that can handle a high amount of data. These structural
tailwinds support Cisco's core switches and routers businesses
which account for 27% and 15% of our price estimate
This growth is also fueled by increasing affordability of
devices like computers as well as the proliferation of smartphones
and tablets that promote data usage. According to Internet
World Stats, the number of global internet users grew by 13% in
2009 amounting to 1.7 billion.
Double-digit growth at a global scale implies the addition of
close to 220 million internet users annually. Cisco estimates that
global IP traffic increased by 45% in 2009 amounting to 15 exabytes
per month. Moreover, the number of online videos viewed in
2009 increased by a whopping 120% amounting to 300 billion.
Growth of Cloud Computing
Cloud service models provide users or enterprises with computing
infrastructure and eliminate the need for locally managed software
and computing resources, such as physical storage. Some of the
major cloud service providers include Amazon (
(CRM) and Google (GOOG).
We expect this area to grow rapidly. According to IDC, the IT
cloud services market is expected to grow from an estimated $17
billion in 2009 to $44 billion in 2013. As more computing shifts to
the cloud, Cisco will benefit from requirements of handling
additional IP data and security services for the cloud.
You can see
the complete $24.04 Trefis price estimate for
Cisco's stock here.