Tech's Ultimate Bellwether

Brian Hicks

Updated February 14, 2007

As a longtime watcher of Cisco Systems, I have always known that the tech giant was a bellwether company in more ways than one.

When the internet exploded onto the scene in the 90s, Cisco was literally at ground zero in the buildup of what became Web 1.0. As Cisco went, so went the industry.

After all, its switches and routers made it all possible, and its share price went hyperbolic along with numerous other names in the run-up to the tech bubble that ultimately collapsed.

But it wasn’t just sales figures and inventory numbers as much as its name that made it a market indicator for me for me back then.

That’s because in the hands of my aunt, its name proved to be the greatest bellwether of them all.

It happened in the spring of 2000 at a typical family gathering of ours. You know the kind: spiral ham, potato salad, a Jell-O mold and some lukewarm beer.

I was making the usual small talk with my pop when my aunt-God bless her-appeared out of nowhere and began talking about how we should look into a stock that she thinking about buying.

She said-and I’ll never forget this as long as I live-that "You guys need to get yourself some shares of Cisco. I think that it could double." Cisco, you may remember, was trading over $100 at the time.

Now, knowing her as I did, my reply was quite simple. "What makes you think that?" I asked her, trying not to chuckle.

"Well," she said, "everyone I know thinks so. And besides," she continued, "I see their trucks all over the place."

With that, I could barely hold onto my warm beer and Jell-O because I was laughing so hard.

I realized that my aunt didn’t know the difference between Sysco Foods and Cisco Systems, and she was about to buy the high flier at its peak.

Of course, once I finally got control of myself, I tried talking her into a nice mutual fund.

But driving home that night, it struck me like a bolt from the blue: My aunt was really no different than that stock-picking shoeshine boy before Black Monday in 1929. And suddenly all of that talk about bubbles began making perfect sense to me.

Cisco, of course, never did double again. In fact, it tanked along with the rest of the high fliers not long after that.

But unlike those other companies, Cisco just kept chugging along-growing and capturing market share. Its share price went virtually flat, but the company didn’t. In fact, it is still one of the market’s greatest indicators of things to come.

That’s why their earnings release last week was so encouraging. The company said that its second-quarter net earnings were $1.9 billion on $8.4 billion of revenue, a 40% net income growth year over year and a 27% growth in sales over the same period in the previous fiscal year.

Excluding stock options, Cisco earned 33 cents per share, more than the 31 cents that analysts predicted.

In short, they turned in a blowout quarter.

They also guided higher. CEO John Chambers forecast revenue in the fiscal third quarter to grow by 19 to 20 percent, versus the average 17 percent forecast from the analysts.

But it wasn’t just the numbers themselves that I found encouraging; it was where they came from.

A quick look at Cisco’s many divisions tells a much deeper story: its new growth is completely tied to the new Web boom. Cisco, it seems, is as powerful a player in Web 2.0 as it was in Web 1.0, and it’s riding this new wave all the way to the shore.

IPTV equipment, voice-over-Internet (VOIP) systems, and equipment upgrades to handle all of this increase in data traffic swelled the company’s bottom line.

And while the development of Web 2.0 is not as obvious or as well known as was the original network, it promises to be nearly as profitable as it was in the 90s.

That’s because all of these much bigger voice and video data files need a much more robust network of gear and switches to make it all work.

And just like last time, Cisco is right in the middle of it. It is sort of like Déjà vu all over again. For that reason, Cisco remains a long-term buy and hold.

Unless, of course, my aunt brings it up again.

Wishing you happiness, health,and wealth,


Steve Christ, Editor

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