surprised many analysts Monday with its impressive quarter --
beating the street's revenue and earning estimates -- and then shocked just about everyone, me included, with its upbeat conference call. CEO John Chambers was his old self, exuding quiet confidence and restrained optimism -- making us believe Cisco was a necessary, important part of the economy.
Chambers talked up Cisco products such as AVVID (Architecture for Voice, Video and Integrated Data), saying he sees demand and expects they will create opportunity for growth. His comments underscore the importance Cisco and others are placing on voice as a platform for growth. Companies like
and Cisco are beginning to persuade IT departments to convert corporate networks into packetized voice platforms. This is no zero-sum game -- there's much potential for vendors to grow this business, because Voice over Internet Protocol platforms have a very small penetration rate.
Cisco's really pushing the platform
, rightly believing that winning these contracts now, minor though they might be, will result in huge revenue opportunities down the road. Say a major corporation like
Procter & Gamble
chooses to use Cisco's AVVID at one location today. The AVVID platform saves P&G money. (AVVID is really a great product and saves money for its users quickly.) Often, just getting in the door with a minor contract is enough to generate serious revenue down the road.
The great quarter and great conference call notwithstanding, the problem with Cisco, as usual, is a valuation one. This time, however, I'm not convinced it's actually a problem. Remember the days when Internet and networking stocks were given huge multiples by the market, partly because the market wanted to see these companies roll up competitors? Not only does Cisco have $17 billion in the bank to play with, but the market's back to putting quite a premium on the stock. Cisco can pick and choose among the penny telecom vendor stocks for the best technology platforms. Those technologies, chosen carefully, can complement and expand Cisco's sales opportunities.
More importantly, Cisco can pick and choose among the bigger, more successful telecom vendors for the best sales channels and customers. By acquiring an established vendor, Cisco would gain access to customers and sales channels that it hasn't previously had access to. Such an acquisition, certainly a financial possibility with Cisco's cash hoard and multiple, would have huge implications on Cisco's growth rate.
Yes, I know Cisco's deferred revenue growth rate is slowing. I know the stock is trading at 100 times its annualized earnings. I know it's not cheap. And let's face it, this stock has run up from the $13-per-share price where
I recommended it less than six weeks ago. In the face of such a run, I'm not rushing out to buy the stock now, despite the quarter. Rather, I'm holding onto what I own. If you're the trading type and bought on my $13-per-share recommendation, I'd take a little off the table here.
Cody Willard is president of TelEconomics Consulting, a financial and technology consulting firm. He is also founder of
Teleconomist.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was senior analyst for a venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard was long ITXC, Enterasys Networks, Cisco, Micromuse, Tellabs, Comverse Technology and Advanced Fibre, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to