Cisco undoubtedly has its share of challenges, many of which Chief Executive John Chambers himself warned of repeatedly in recent weeks. The networking giant was roundly thrashed for missing analyst estimates in its latest earnings report, sending its stock into a tailspin.
But even Cisco's harshest critics would be hard-pressed to cast it as a faltering company in a dying industry. If anything, chief executives in all sectors of the industry would kill for growth rates that even began to resemble Cisco's numbers.
Even with its stock price at a 52-week low (shares closed at US$28.19 Friday), the company's market value remains above $200 billion. Until recently it has been adding 4,500 new employees per quarter (though it has now instituted a near freeze), while annual growth rates have consistently exceeded the industry average for years. Cisco grew 55 percent for the fiscal year 2000.
All of which argues in favour of a reality check on the health of this industry leader. That, however, cuts to the heart of the issue: Reality is an elusive concept when it comes to company assessments on the stock market.
"Wall Street does tend to react with a herd mentality oftentimes. People are momentum investors. They don't care what the stock valuations are as long as the company keeps beating the numbers," said analyst Seth Spalding, of Epoch Partners.
"And if there is negative (news) from a company, that negative will exceed reality. Cisco has finally not been able to meet the high expectations that have been set for it. Cisco is not a bad company, but I do think Cisco needs to be valued based on the numbers out there, their published estimates (for upcoming quarters)."
Cisco's current price-to-earnings ratio is 44, down from a stratospheric high of 102 in December 1999. The P/E ratio--the stock price divided by the expected earnings per share for the next four quarters--is a common benchmark for determining whether a stock is overvalued. By comparison, IBM has a P/E ratio of 25 and Microsoft's is 34.
A high ratio indicates that investors believe the company's earnings will rise quickly, thereby justifying the lofty stock price. Depending on who is asked, Cisco is either vastly overvalued and growing far beyond its means or a hugely successful company whose stock is taking an unfair beating among shortsighted and unrealistic investors.
"If you want to invest today with a 10-year horizon, the investment is a good idea. But if you want to invest with a one-year horizon, it's not a good idea now because of the (economic) down cycle," said Paul Sagawa, analyst with Sanford C. Bernstein & Co.
