Technology

Can Cisco Rise to the Challenge?

Because of the dismal economic climate, the forecast for Cisco is now cloudy. Just how bad is the storm going to be?
Joseph RadiganJanuary 11, 2001

(Editor’s note: “Today in Technology,” will cover the corporate technology market on a daily basis. Comments are welcome. Send E- Mails to [email protected])

Cisco chairman and CEO John Chambers was everybody’s favorite computer industry executive for the past year or so. Through 1999 and early 2000, as Microsoft got bogged down with its antitrust trial and its stock stumbled, Bill Gates’ star lost some of its luster.

During that same time, Cisco soared on. The company made gobs of money and so did its shareholders, and Chambers quickly became the sector’s new rock star.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

This past year, as the tech market worsened, even Chambers isn’t getting the adoring fan mail that he once did. Cisco is still very profitable, but its growth forecasts are no longer as optimistic as they once were, and that’s the heart of the problem.

Chambers acknowledged as much Wednesday morning, when he told a group of shareholders at an investment conference sponsored by Morgan Stanley Dean Witter that the global slump in the technology sector caused a slowdown in capital spending. The pullback had already become a drag on Cisco’s revenue growth and made the current quarter that ends this month “more challenging” than expected.

The problems are hardly unique to Cisco. Almost all the major networking companies have seen their revenue growth falter in the last few months. The surprise has been the suddenness of the ugly change in fortunes.

Cisco’s management hasn’t formally changed its guidance to The Street, but whereas the tone of their outlook was fairly bullish in early December, now there appears to be more hesitation in their statements. Bloomberg News quoted Chambers as saying, “Our visibility isn’t as good as it normally is.”

The uncertainty was enough to cause Cisco’s stock to fall 9.4 percent to an intraday low of $33.64 on Wednesday. By the market’s close, the shares were back to $36.25, a loss of $0.88 for the day. This is a far cry from last March, when Cisco hit a 52-week high of $82.

Cisco’s woeful Wednesday was compounded by an analyst downgrade from Steve Kamman, who initiated coverage of the company for CIBC World Markets with a “hold” recommendation. The analyst Kamman replaced had a “buy” on the stock.

On the one hand, it may be like shooting fish in a barrel for an analyst to downgrade a stock after its lost more than half its value. But the CIBC analyst is coming on the scene during an important transition in the market, and there are valid reasons to pay attention to his forecast.

First, we’re now in the Reg. FD era. When the bull market was running full steam ahead, company executives could give their “guidance” to a favored analyst or two who would then issue “buy” ratings with new price targets. The stock would get a healthy bounce, and everyone seemed to be happy.

But Reg. FD has put a stop to these favored disclosures. Securities analysts are now obligated to perform their own, gulp, research on stocks they follow. In Kamman’s case, the research is especially important because, again according to Bloomberg News, he worked at MCI before it was bought by Worldcom.

Market watchers are free to disagree with Kamman, but his understanding of the computer networking industry comes from first hand experience, and he believes that many of Cisco’s products are no longer as current as those of its rivals. Kamman’s downgrade stemmed from his assessment that Cisco will continue losing market share to its rivals because its technology fell behind theirs.

Second, even without Reg. FD, the bear market devalued the currency of “buy” recommendations and bullish forecasts. Maybe the Cisco downgrade came too late to do investors any real good, but analysts who downgrade a stock often have a harder time getting an audience with corporate executives.

In this environment, it may not be possible to make money from analyst recommendations, but some of the negative forecasts now in circulation may be more informative about the tech industry’s future than what passed for stock research when Net stocks were running at a fever pitch.

Third, Cisco could still step up to the plate and match its rivals’ products. But networking technology is changing, and if Cisco falters, it won’t be the first company to lose its grip on a market it once dominated. It happened to IBM in the 1980s, and it’s happened to Microsoft in the last couple of years as the Windows desktop has been superceded by the Internet.

When a market is so gloomy and even the forecasts for its bellwether stocks are so bleak, it’s all but impossible to concentrate on the new technologies that are emerging. But the next generation of networking technology will drive the inevitable economic recovery, it’s just not clear when the new products will kick in or who will provide them.