Cisco: Impact of Top-Layer Switches Market Share

Cisco has maintained its dominant market share in layer 2-3 switching market, which is mainly comprised of ethernet switches.
By Trefis ,

NEW YORK (Trefis) -- Cisco (CSCO) - Get Report has maintained its dominant market share in layer 2-3 switching (bottom layer) market which is mainly comprised of ethernet switches. However, the company seems to be losing ground when it comes to layer 4-7 switching (top layer) market and has been witnessing declines in its market share for quite some time.

Cisco competes with other players like

F5

(FFIV) - Get Report

,

HP

(HPQ) - Get Report

and

Juniper

(JNPR) - Get Report

in layer 4-7 switching market. While Cisco has lost share, F5 and HP have gained significantly in layer 4-7 ethernet switches. Juniper still remains very small in this arena.

Layer 4-7 switching is used for server load balancing which essentially means directing and managing data flow to websites. There are different types of switches depending upon the network type -- common ones are ethernet, fiber channel and converged network switches.

According to research from

Dell'Oro Group

, Cisco has maintained 72% market share in overall ethernet market, but its market share in layer 4-7 ethernet switches declined to only 14% in Q3 2010 compared to 25% during same period in 2009. For size, the layer 4-7 ethernet switch market (which is a part of overall layer 4-7 switch market) amounted to $300 million in Q3 of 2010.

Should Investors be Worried?

Investors should be least worried about what is happening in layer 4-7 market primarily because Cisco's dependence on this segment is very limited. We estimate that Cisco's revenues from layer 4-7 switching business are approximately 8% of what it earns from layer 2-3 switching.

This is primarily a result of huge differences in market sizes and Cisco's dominance in layer 2-3 segment. Under an extreme scenario where Cisco's market share in layer 4-7 switching was to decline to 0% by end of our forecast period, its price estimate will suffer a downside of around 3%.

Below you can see how change in Cisco's market share in top-layer switches (layer 4-7) can impact its price estimate.

You can see the

complete $24.04 Trefis price estimate for Cisco's stock here.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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