Investment bank CIBC has downgraded networking giant Cisco’s shares.
John Chambers, CEO of Cisco, on Wednesday told shareholders that the current business climate is more challenging than in the past and that the economy is slowing faster than people realize. Beforehand, investment bank CIBC downgraded the company’s stock from ‘buy’ to ‘hold’. The two developments led Cisco shares to fall by 6.3%.
Lower economic growth means that many US companies are likely to cut or at least slow the rate of growth of spending on networking projects over the next year. This could well mean that Cisco’s US sales growth for 2001 slows. But CIBC’s concerns go beyond this. Analyst Steve Kamman believes that Cisco will lose market share to its rivals as its technology falls behind, eventually losing its dominance over IP networking.
At this point, it’s worth taking a reality check. Cisco is an extremely profitable business with enormous market share in the IP layer. For example, in high-end terabit routers it has a market share of around 75%. Its rivals are showing little sign of catching up – after all, biggest competitors Nortel and Lucent have recently announced comparatively terrible results.
To say that Cisco’s kit is no longer technically good enough is to miss the point. In areas such as optical networking, precisely because Cisco did not have a presence, it went out and bought companies to cover its bases. All large technology companies need to find, integrate and brand these acquisitions in order to ship product. Cisco has consistently done this. While there are always new start-ups promising the best technology, most haven’t shipped any kit yet and some haven’t even started manufacturing it.
Cisco is in a strong position. It is dominant in the enterprise space with IP and ATM and has moved into the high-growth area of content switching with its Arrowpoint acquisition. Whilst Cisco has not been strongly involved in the traffic transport layer, it has recently bought Cerent, which is active in the currently hot metro area of transport. As a result, Cisco is well positioned for the current Holy Grail of networking – integrating the transport and the IP layer for fast and flexible intelligent optical networks. The prophets of doom are seriously mistaken.
