Cisco and the Tech That Time Forgot; Its Disappointing Outlook Underscores How Lumbering Tech Giants Can Become Too Big for Their Own Good

August 16, 2013 Leave a comment

August 15, 2013, 2:50 p.m. ET

Cisco and the Tech That Time Forgot

Its Disappointing Outlook Underscores How Lumbering Tech Giants Can Become Too Big for Their Own Good

ROLFE WINKLER

Enterprise-technology companies should be a dynamic bunch. But investors are right to treat them like the pack of dinosaurs they have become.

Cisco Systems CSCO -7.17% is the latest to disappoint Wall Street, joiningOracle, ORCL -2.50% Intel,INTC -2.39% Microsoft MSFT -1.73%and International Business Machines IBM -0.93% . Though Cisco’s latest quarterly results mostly met expectations, its outlook for next quarter—calling for lighter sales than expected—has investors worried that, like the others, it just can’t be relied upon to sustain top-line growth.Interestingly, investors seem to be writing off the whole group. Today, those five companies’ stocks trade in a tight range of 10.6 to 12.3 times the next 12 months’ earnings, according to FactSet. At the midpoint, that is a 20% discount to the S&P 500. Ten years ago, the five traded in a range of 18 to 33 times earnings, at the midpoint a sizable 40% premium to the broader market.

Partly, the group is a victim of its own success—having grown so large, it is hard to keep momentum going. Take Cisco. It developed an innovative line of servers, sales of which increased to $1.6 billion by 2012, from $378 million in 2010, according to IDC estimates.

That is a home run for any company. Unfortunately, for one with $50 billion in annual sales, it doesn’t change the score very much.

More worrisome for the group are the poor fundamentals of their end markets. IDC forecasts that, excluding hot sales of mobile devices, overall information-technology spending will increase 1.7% world-wide this year, and in dollar terms, just 0.2%. Cisco’s gain in servers, for instance, has mostly come at Hewlett-Packard‘sHPQ -4.53%  expense.

If the pie isn’t expanding, everyone has to fight more aggressively for a slice.

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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