) released earnings last week and lowered its revenue guidance for
next quarter as well as for its fiscal year 2011 based on a
slowdown in public spending. Cisco competes with Juniper (
), Alcatel-Lucent (
) and Tellabs (
) in the routing and switching businesses.
We currently forecast that Cisco will maintain
its dominant market share in excess of 70% for the routing and
switching businesses, but if it loses 5% share in each of these
businesses due to its higher exposure to the public
sector, this would translate to around 4-5% downside to our
lowered price estimate.
As a result of the company's weaker guidance, we have lowered
our price estimate for Cisco's stock to $24.04
, which is about 20% above the current market price.
Weak Public Sector Spending
Unlike its enterprise business, the public sector business has
slowed considerably for Cisco. The company stated that for Q1 2011
fiscal year, public sector order growth was a modest 6% versus
enterprise order growth of 16%, on a year over year basis.
Most of this slowdown was caused by significant reductions in
public spending. Facing budget deficits, the US, Japan and
some Central European countries reigned in its IT spending more
than expected. Cisco stated that it will continue to face these
challenges over the next few quarters, and we believe this holds
negative implications for its market share outlook.
Market Share Outlook
As Cisco's products tend to be more expensive compared to its
competitors, public budget constraints will continue to hurt
Cisco's order growth in coming quarters as officials look for
We estimate that about 20% of Cisco's product revenues come from
the public sector. According to
, Cisco has higher exposure to the government sector compared to
its competitors. Therefore its higher relative dependence on public
spending could result in combined market share losses if other
segments continue to outpace public spending.
Currently we forecast a largely stable market share for Cisco's
routers and switches units. However, if its market share declines
by 5% in both segments versus our expectations, our price
estimate could see additional downside of 4% to 5%.
In these charts, you can see how changes in market share
forecasts impact our price estimates.
You can see
the complete $24.04 Trefis price estimate for
Cisco's stock here.