Could we be seeing a top in the price of Cisco (NYSE:CSCO) shares? What's the first clue? A herd of Wall Street brokerages, among them Pacific Crest, Deutsche Bank and Credit Suisse, have at last upped their ratings on the networking technology giant's stock.

20 Tools For Building Up Your Portfolio

Mind you, Cisco stock has gained more than 25% since I recommended it in February. Between then and now, brokerage analysts have pretty much stayed neutral or else pessimistic on the stock. And, as is often the case, they may now be too late to the game.

By my reckoning, expectations for any kind of turnaround in the company's businesses are now built in to Cisco's $22.44 (Learn how to use revenue and expenses, among other factors, to break down and analyze a company. Read Understanding The Income Statement.)

Correction, Not a Run
With the stock falling below $14 in March, the recent uplift is certainly justified. But, in my mind, the correction is now complete. Even as the company pushes into sexy, new advanced technology territories like home networking, digital TV and IP telephones, Cisco is going to be hard-pressed to post growth numbers that warrant anything much higher than its current price tag.

After all, Cisco is a victim of the law of big numbers. Like its large cap technology cousins Intel (NYSE:INTC) and Microsoft (NYSE:MSFT), the bigger Cisco gets, the tougher it gets to grow. Even a few billion dollars in extra sales won't do much for a company whose revenue is already in the billions. The thing is, in today's dismal economic climate, even flat line sales growth would be a pleasant surprise.

Competing and Winning
Cisco dominates the market for networking router and switch hardware. Nearly two-thirds of its sales come from these solid, cash-generating product lines. Unfortunately, Cisco and other networking vendors have watched sales in these markets deflate over the past couple of years as penny-pinching enterprises and telecom carriers slashed their equipment spending.

Of course, customers might start spending again but fierce competition from the likes of Juniper Networks (Nasdaq:JNPR), Brocade Networks (Nasdaq:BRCD), Alcatel-Lucent(NYSE:ALU) and from China's low-cost provider Huawei Technologies, could make it tough to show any kind of material growth for some time. (Evaluate the past performance before investing in high-tech funds, read Technology Sector Funds.)

Hard to Keep Climbing
So, to boost its market value any higher, Cisco will need really big gains from outside of its traditional hardware business. Cisco is going to have generate monstrous gains, as much as 30% I'd say, from its expanding advanced technology portfolio to justify its stock's forward price-to-earnings multiple of 17.

That's asking an awful lot. Revenue from advanced technologies totaled $2.1 billion, representing a decrease of 12% year over year. It's hard to see where the necessary growth will come from. Already, Cisco removed over $1 billion from its annualized expense run rate and hopes to stretch that number to $1.5 billion. But there is only so much fat the company can cut.

Of course, reducing its number of shares outstanding through share buybacks could boost earnings per share. The trouble is that Cisco is already buying back shares to offset the effect of the generous stock options issued to employees.

The Bottom Line
Cisco has seen a nice run-up in its shares and as a consequence, investors should think twice about snapping up any more of them. Of course, it may take a few more brokerage buy ratings before the Cisco finds a top, but it sure looks like it's getting there.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  4. Investing Basics

    3 Key Signs Of A Market Top

    When stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
  5. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  6. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  7. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  8. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  9. Investing News

    6 Signs You Are Addicted To Investing

    An addiction to trading can ruin your life and relationships. Not to mention the monetary costs. There are telltale signs that you've gone too far.
  10. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  1. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!