Wednesday, August 8, 2007

As Cisco Goes ...

We had quite a stock market rally today, especially in the technology stocks. Some people who had gone short on worries about credit tightening had to cover their bets, judging from the upward spike.

The rally is being widely attributed to the Federal Reserve statement issued yesterday and Cisco's (CSCO) report on its Q2 results. I listened to the Cisco Q2 analyst conference (See my summary) and got an idea of why Wall Street would read so much into a report that only saw the company beat sell-side analyst average expectations by one penny.

Cisco's revenues are booming. Cisco is probably the most important provider of hardware to operate the Internet. Its main products are routers and switches. It is a global business and has huge market share. With no disrespect meant for the engineers at Extreme Networks, Jupiter, Sycamore Systems, or any of its competitors, it is difficult to beat Cisco when it comes to technological innovation and breadth of products available to solve the problems that confront telecommunications companies, Internet-based businesses, and global enterprises and consumers.

So aside from growing its own revenues 18% in one year, what about Cisco's report would spark a technology stock rally? Other bellwethers have been mixed, with Motorola struggling and many chip makers below or barely above last-years revenue numbers.

Cisco reported that global sales were strong and broad (by product type). Businesses are spending money when they think it can save them money or improve efficiency. There were some notable exceptions, but they were drowned out by the all-around strength of the global economy.

One exception was Japan. In line with what other companies are saying, decisions about technology equipment buying have been in delay mode in Japan for about a year now, particularly when it comes to the big telecommunications companies.

In the United States there were three vertical markets that were weak. One was financial services; no surprise there. Another was automotive; again no surprise. Retail sales was also below expectations. Without a doubt big retailer are cautiously hoping that the housing bust won't hurt retail spending too much.

What is driving the need for more Internet equipment? Against a background of the continued shift to Internet, including using it for phone service, is an explosion of demand for video over Internet. Video requires huge numbers of bytes of information transmitted rapidly in order to work. All the text web pages at, say Google, pale in comparison to the amount of bandwidth it takes to move a few video pages across the Internet.

Cisco is meeting that demand. But many other companies, not just router and switch makers are benefiting as well. Video requires servers and storage. Processor makers like AMD, Intel, Sun and IBM; server systems makers like Dell, HP, and Rackable; and the various semiconductor manufacturers that make chips that glue all this together are all going to see larger that previously expected demand. Fabs that take these companies outsourcing, optical component makers, and the people who make the machines that make the semiconductors like Applied Materials should all benefit.

So what we may be talking about here is sector rotation. The technology sector has been neglected by many investors since the year 2000 meltdown. Prices are not at all frothy. If Cisco is right about future demand, and if that demand goes out more broadly

Then again, nothing is certain in the world of stock speculation. Maybe Cisco is the exception to the rule; maybe demand in narrow and temporary, rather than broad based and about to roar in like a tsunami.

Video. Telepresence. Think about it. A billion people broadcasting and receiving video around the world, all the time. The Bandwidth. The Bandwidth.

More data:

Cisco Investor Relations page

I do not own Cisco stock, but I wish I did.

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