Monday, February 14, 2011

Cisco's Continuing Woes

I recently exchanged some email missives with an old friend who escaped the collapsing financial sector for the decidedly greener fields of the California technology sector. He was glum over that day's equity price performance of his new firm, Cisco.

I didn't think much of it, until I read, later that day, of Cisco CEO John Chambers' downbeat outlook and the lackluster quarterly earnings report.

I wrote this post last November, on the occasion of the company's and Chamber's last sobering, disappointing quarterly outlook and earnings report.

"However, a much more revealing chart is the next one, spanning the public life of the firm. It produced shareholder value so fast in its early years that comparisons with the index are really pointless. But it's easy to see that, like Microsoft, Cisco has really 'enjoyed,' or, more pointedly, its shareholders have not, a lost decade. From its peak at the peak of the technology bubble in 2000, Cisco slid dramatically and really never substantially recovered.

I have checked my own records, and do not find evidence of the firm in any of my portfolios after early 2000. Between its dismal total return performance, relative to better-performing firms, and, I expect, slowed revenue growth, the firm joined the list I mentioned earlier in the post. Those technology firms whose charmed life of meteoric total return and revenue growth has slipped into history, almost certainly never to return.

Thus my amazement that pundits still put so much emphasis on the firm's every move. The information is clearly available for all to see- Cisco hasn't been a consistently superior performer worthy of long term holding for a decade. You'd have to be a market timer to have earned significant gains by owning the firm during that period. And if you simply bought and held, you'd be a big loser."

The price chart for Cisco, Dell, Intel, Microsoft and the S&P500 Index which appears at the beginning of this post bears out my contention.
More surprisingly, Thursday, on CNBC, one pundit was actually arguing that it's time for Chambers to find a new job. And whereas Microsoft is usually given a magical pass for its lost decade, Cisco doesn't seem to merit the same kid glove treatment.
A Wall Street Journal article in the Heard On The Street column matter of factly notes that the switch market, which Cisco rode to success a decade ago, has matured and become much more competitive. Revenues and margins are down. Like so many other technology firms have experienced, it appears that Cisco's main engine of profitable growth has flamed out, or settled down to a constant, slow burn, with no similar product/market to replace its earlier performance.
John Chambers and Cisco, meet Joseph Schumpeter's world of competitive, dynamic capitalism. Cisco hasn't been selected for my equity portfolios in at least a decade. Like the other firms I included in the price chart- Dell, Intel and Microsoft- all were once profitable contributors to earlier portfolios. But, once growth ebbed and returns came back down to earth, they were jettisoned, never to reappear.

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