Prepared by Morgan Stanley Dean Witter analysts Christopher Stix, Todd Smith, and Marco Bitran
CSCO.OPrice (September 29, 2000): $55.2552-Week Range: $82.00-$32.53
Recently there has been some visibility concerns in the large-cap tech sector, bolstered by last week's pre-announcement from Intel. If you are looking for visibility, we believe Cisco is the right place to be.
Cisco's 10K, which filed after the Sept. 29 close, showed that backlog had increased 315 percent Y/Y to $3.8B. The backlog increase, to almost eight weeks of sales, is significant.
Deferred revenue also increased 91 percent to $1.4B. What the backlog number means is that this quarter is done (Q1 ending October 2000) and so is part of next quarter. We believe that any component availability issues result strictly from strong demand.
Our checks with distributors on Sept. 29 support the view that the backlog has increased because demand is exceptionally strong. Distributors focused on the enterprise are growing shipments as much as 20 percent Q/Q and are indicating that they could double this pace if sufficient product were available.
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Strong new products coming for cable, enterprise
The company plans to deliver a new, higher-end cable modem termination system in Q4:C00. This will be a version of the 10,000 router supporting up to 100K homes passed. This product will be DOCSIS 1.1 and 1.2 compliant and will support voice and video distribution services. In addition, a new high-end LAN switch product, code named Constellation, will also announce in the near-term. This product, which will deliver an industry leading 640 to 960 Gigabits per second switching capacity, will extend the leadership position it possesses with the 6500 family of products. (The company owns about 57 percent of the Ethernet LAN switch market).
Market reports point to leadership in broadband aggregation
In two recently published reports put out by market research firms Infonetics Research and Synergy, Cisco showed significant share gains in the broadband arena. According to Infonetics, Cisco's DSL access concentrator port shipments grew 87 percent sequentially in calendar Q2:00, with particular strength in ADSL port shipments (up 148 percent Q/Q). Cisco ranked first in both units shipped and total revenue in the quarter (Infonetics Research).
In the cable access concentrator market, Cisco continues to hold the leading market share position (Infonetics Research, Dell'Oro, Synergy). Synergy Research recently ranked Cisco the calendar Q2:00 leader in overall broadband aggregation, with a 50 percent market share in units shipped and 36 percent share in revenues.
Increased focus on core router business
Cisco has come under some fire due to share losses in the gigabit router market. We believe that there have recently been some internal changes within Cisco in an effort to refocus efforts in this market.
Roland Accra, who led Cisco's penetration of the access concentrator market, has been appointed to lead marketing for the 12,000-product family. We continue to believe that, with a more than 75 percent market share, Cisco is in a very strong position in this rapidly growing segment. We also believe that market share erosion in this market was inevitable, given the desire of service providers to have two equipment vendor sources for networking products.
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Cisco discusses the first end-to-end CDN system
Also on Sept. 29, Cisco hosted a Webcast overviewing its Content Delivery Networking (CDN) suite. Cisco is the first vendor to deliver a system that allows service providers and enterprises to deploy CDNs with equipment from a single infrastructure provider.
As the CDN market has become increasingly crowded over the past few months, it has become difficult to pick the winners from the slew of infrastructure and service offerings. We believe Cisco has differentiated itself from competitors through its ability to provide a full complement of products such as content distribution and management software, global content routers, content switches, load balancers, and edge caches.
As CDNs often involve multi-network cooperation, we also see Cisco's industry leverage and strong sales channel as significant competitive advantages.
We believe the market opportunity for content networking infrastructure and services will exceed $20B by 2004. In mid-2001 we expect to see rapid adoption of CDNs as content delivery services become mission-critical to content providers. Moreover, the economics of CDNs are highly attractive to network providers, as they drive revenue through value-added services while reducing bandwidth costs. Finally, analogous to the commoditization of raw bandwidth over the past few years, we are now witnessing the commoditization of hosting services. By offering CDN services, we believe ISPs and Web hosters will achieve higher margins and differentiation from competitors.
CDNs present investment opportunities—Timing is key
Disruptions from new technologies and standards present investment opportunities. We believe that there are significant opportunities in this space, but timing will be key. We expect growth in the mid-2001 time frame, as network providers commit to large CDN rollouts.
We maintain our strong buy rating
We continue to believe that business is very strong at Cisco, and that our estimates are conservative, especially given the backlog and deferred revenue numbers stated in the recently released 10K. We believe the company is seeing significant demand throughout the world, and that it is visibly very strong.
We also expect management to become more visible between now and the end of the year. The company will report fiscal Q1:01 earnings in early November, followed by an analyst day in early December. We are maintaining our Strong Buy rating and price target of $90.
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