Biz Dev in NYC by Rob Tsai

I’ve recently bought a couple lots of Cisco (CSCO) from $27.50 to $29.50, thinking that I had near term support at $27.  As of this writing, CSCO has broken through the $27 level, and now sits near $26.25, which surprised me.  Normally, you’re supposed to sell when a stock breaks a support level, but I’m thinking of this as a long term position (at least one year), so I won’t try to sell it and pick it up cheaper.

I had thought that the sell off from $34, after their last earnings announcement where they beat their quarterly number but the stock sold off 10% nonetheless, was overdone and that the $27 to $29 range represented a good buying opportunity.

For example, SeekingAlpha picked up this BusinessWeek story in December 2007 on AT&T’s order (up to $500 million worth) to upgrade its network.

Here are some highlights of that bullish article:

• What’s noteworthy isn’t simply the size of the deal but the vast amount of bandwidth it represents. When Cisco brought out its top-of-the-line router in 2004, many analysts felt it was so powerful that only a handful of companies would ever buy one. Now, AT&T (T) plans to link 25 cities with these mighty machines to help it handle the rising tide of Net traffic—particularly video.
• Now other telcos and cable companies, located everywhere from Korea to Bulgaria, are flooding Cisco with orders—and helping realize its dream of conquering the telecom market, long a domain of Alcatel-Lucent (ALU), Ericsson (ERICY), and Nortel (NT).
• Thanks to all this activity, Cisco has been grabbing market share. Its piece of service provider sales has grown from 7.5% to 8.4% between the second quarter of 2007 and the same period last year, according to IDC. That growth has come at the expense Alcatel-Lucent, establishing Cisco as the world’s fourth-largest equipment provider for carriers, a bump from No. 5 last year. As telcos jump into video services, they’re replacing separate voice, data, and video networks with a single one based on Internet technology.
• The quick growth of its service provider business carries huge implications for Cisco. In a world in which more and more computing occurs out on the Internet as opposed to inside PCs and corporate networks, the companies that handle all the communications needs—carriers and cable companies—become increasingly crucial.

My one disagreement with Cisco’s strategy is their direct-to-consumer business.

• But Cisco also wants to sell to consumers that want to buy gear directly, rather than rely on carriers. It’s a question of so-called channel conflict. Cisco is well-positioned to reach consumers in both ways, either by striking a deal with your local phone or cable company or by selling you gear at the local Best Buy (BBY). Many analysts think the latter will become more popular, as a generation of Web-savvy consumers seeks to create their own Internet experience rather than pay a big monthly bill for premium services from carriers. Cisco’s challenge: how to go after this direct business without ostracizing its carriers, which are banking on selling those premium services to avoid having to subsist on selling basic connections at commodity prices.

I think Cisco should stick to servicing the enterprise and carriers and avoid the consumer play.  Can you name which of these router companies is a Cisco one?   Linksys, Netgear, D-Link, Belkin?  (btw it’s Linksys).   And who cares anyway?   You can get routers from Best Buy for like $50, and they always carry big rebates.   I can’t imagine they carry much margin given the commoditized product space, the competition, and the the low price point.  And with Circuit City’s imposion, I’d look to even more negative pressure on these commoditized products through early 2008 as they liquidate their inventories  On the flip side, I like Cisco’s acquisition of Scientific Atlanta (set top boxes and DVRs), as cable companies typically bundle these for free to the consumer to pick up the recurring subscription revenue. 

In the end, though, I look for Cisco’s growth and margins to be driven by their carrier relationships, and I believe that the global communication trends, such as -

• cell phones everywhere
• migration from 2.5g to 3g and beyond
• internet telephony
• video over IP
• mobile applications
• multiplayer online gaming
• corporate WebEx presentations (another Cisco company)
• videoconferencing

will drive demand for bandwidth and therefore investment in the carrier infrastructure that should benefit the Cisco shareholders.

Also, Cisco’s large size ($160 billion market cap) is consistent with a  more defensive investment strategy in 2008 to stay with large caps (with global exposure) over smaller caps.

The author has a long position in CSCO