Talk Is Cheap, but Cisco Isn't

Some people are talking up Cisco (CSCO Quote) because it looks good next to Lucent and Nortel.

Talk about damning with faint praise. Who doesn't look healthier than Lucent? Winstar?

That aside, there are two big reasons you don't want to buy Cisco: The stock is still priced for 1999-style growth, which we'll probably never see again, and no one has any idea when the market for Internet gear will start growing again.

Check out Cisco's financials. Sure, there's the $18 billion in cash and no debt. Great. But there's also the plunging sales (down 25% in the latest quarter from a year ago), the flood of red ink (Cisco lost a cool $1 billion for fiscal 2001, just a year after it earned $2.67 billion) and the narrowing gross margins (falling into the low-50% range last quarter and looking to stay there in coming periods). Cisco has so little confidence in its business that it isn't even providing earnings forecasts for the next quarter.

Next, take a look at the stock. Even after a 70% plunge since last summer, Cisco still trades at around $18.50. Wall Street expects the company to earn 26 cents a share next year. That means that Cisco's trading at a forward price-to-earnings ratio of 71. That's expensive for any company, but especially for one competing in an industry whose big spenders have done nothing but tighten their belts over the last six months. And again, no one has any idea when that might change.

You might like Cisco as a company, but it's a bad, bad risk as a stock.