Cisco's Downside from Switching Woes

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Cisco ( CSCO ) is losing some traction in the switching market, which is evident from its recent earnings announcement. This is the largest contributor to Cisco's stock value, and so we have lowered our estimates based on this. Competition is heating up leading to market share losses, and this is putting pressure on prices which will ultimately impact Cisco. Cisco competes with companies like Juniper (NYSE:JNPR), HP (NYSE:HPQ) and Alcatel-Lucent ( ALU ) in the networking equipment business.

Our price estimate for Cisco is $22.70 which is around 40% ahead of the market price.

Broad Market Shift In Switching Creating Problems For Cisco

As stated by Cisco's management during its recent earnings announcement, the switching market is undergoing a major transition which is putting pressure on Cisco's revenue opportunities as well as margins.

As consumers look to upgrade to faster switches (10 GbE), it opens up opportunities for competitors because of their cost advantage. Given that Cisco's products tend to be higher priced than some competitors, the company will need to lower its own pricing or give up market share - both of which hurt Cisco.

To add to the above, we have also discussed previously how demand from data centers could again put Cisco's share at risk by opening up channels for niche competitors (see article Cisco's Switches Market Share Outlook for 2011 ).

Value At Stake

We estimate that network switches constitute about 25% to Cisco's stock value, thereby it is the most valuable business for the company. This includes our expectations of significant market share declines in 2011. However beyond that we expect Cisco to perform more competitively and maintain its market share. If Cisco loses market share over time, this will lead to downside from our price estimate.

You can modify the forecast above to see how further declines in the switching market share can impact Cisco's price estimate.

See our complete analysis for Cisco's stock here.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ALU , CSCO

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