What Was Cisco Thinking?

By James Brumley | March 08, 2010 AAA

Prior to Tuesday, there was much speculation about the earth-shattering breakthrough that Cisco Systems (NASDAQ:CSCO) was going to unveil. Investors were on pins and needles, not sure what to expect, but certain it was going to make the stock a must-have. As the company's spokespeople put it, it would "forever change the internet and its impact on consumers, businesses and government." Wow - strong words indeed.

What investors got, however, was something stunningly-less dramatic. The stock closed exactly flat for the day, as the announcement was a complete dud.

What was the product at the heart of the non-event, and why? Better still, what can investors (and Cisco for that matter) learn from it? Keep reading - this is something you'll want to keep in mind the next time Cisco is talking itself up.

IN PICTURES: 7 Forehead-Slapping Stock Blunders


A Technological Non-Breakthrough
So what was the game-changing invention? A better router.

Oh, don't get me wrong - it is a better router, able to send digital information over the internet at a pace of 322 terabits per second. The company says that's about 12 times faster than any other router can operate right now; a '100 gigabyte' router, capable of sending - via the web - a digital copy of every movie ever made in four minutes.

It's nothing you or I would be interested in hooking up to our computers though, to be sure. This is telecom/telecable-level technology for managing network traffic, with a price tag of about $90,000 each, but perhaps worth it to those who need it.

So why didn't the stock budge? Two reasons: The first reason is that nobody cares because nobody knows what it means anyway; the second reason is because despite Cisco's implication that it was the first to reach the technological milestone, it's actually already been done. The first reason is self-explanatory, but the second might need some going over.

Beat Them to the Punch
Sorry Cisco, but you're not going to blow anybody's mind with your 'breakthrough'. Why? Because Verizon (NYSW:VZ) already did it. In partnership with competing router manufacturer Juniper Networks (NASDAQ:JNPR), NEC Corporation and Finisar (NASDAQ:FNSR), Verizon successfully delivered data at 100G speed using a fiber-optic connection.

Wait - it gets even more unimpressive.

Cisco's equipment itself won't actually be released until the third quarter of this year, give or take. In the meantime, Google (NASDAQ:GOOG) has announced its intention do develop its own high-speed network. They'll be small in scale initially, you have to assume the company's not just doing it as a hobby.

Beware of Google
So what? There is some chatter that Google could actually utilize the new Cisco router to power the network. Possibly. On the other hand, Google said nothing about designing its own cell phone when its Android smartphone operating system was launched a little over a year ago. This means that Google clearly isn't afraid to develop its own hardware, which may be a far more feasible logistical option if its networks start to sprout and grow. Or, the network may never get off the ground. Either way, it's not like Cisco has a guaranteed new customer lined up.

Bottom Line
Even putting aside all the competition that Cisco is facing with Juniper before the new router officially launches, the hype is still mostly unmerited. How many $90,000 routers does the telco industry need? Cisco has sold only 5000 of the prior-generation routers over a period of years. Generously assuming the company will be able to sell the same number of the newer routers in one year (which would theoretically be unnecessary if the things can offer far greater capacity), that's still only $450 million in potential sales - and that's a very aggressive possibility.

Not that $450 million is chump change, but considering Cisco posts annual revenue in the $30-$40 billion range, the company is lucky that the market let the stock off the hook with only a flat performance for the day. Not only did the announcement not "forever change the internet", it used up a great deal of investor goodwill by inflating the stock to unjustified levels. (For more, check out Stock Analysts: Should You Listen?)

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

You May Also Like

COMPANIES IN THIS ARTICLE
Related Analysis
  1. Stock Analysis

    Will Cuba Be the New Investment Hub for US Telecom? - Analyst Blog

  2. Stock Analysis

    Equinix (EQIX) Closes $1.5B Credit Facility; Shares Gain - Analyst Blog

  3. Stock Analysis

    BlackBerry Posts Earnings in Q3, Revenues Lag Estimates - Analyst Blog

  4. Stock Analysis

    Stock Market News for December 19, 2014 - Market News

  5. Chart Advisor

    Profit From Holiday Spending With This ETF

Trading Center