Significant Growth Potential for Cisco’s Network Security Business

Cisco’s (NASDAQ:CSCO) revenues from sales of networking equipment like virtual private networks (VPNs) have risen consistently from around $1.1 billion in 2005 to around $1.9 billion in 2009. As the market for network security grows with growing demand for data security, Cisco is going to be a key beneficiary as it leads the market with around 40-45% share. Cisco competes with other players like Juniper (NYSE:JNPR), HP (NYSE:HPQ), Check Point (NYSE:CKP) and McAfee (NYSE:MFE) in the network security market.

As Cisco continues its integration of network security solutions with its existing router platforms, this will result in higher sales of its security products, thereby boosting its market share.

We expect Cisco’s network security revenues will touch $3 billion by the end of Trefis forecast period. In comparison, Trefis members project revenues will rise further to around $3.6 billion, representing a slight advantage to our price estimate for Cisco’s stock. Since network security & other products constitute around 9% of Cisco’s stock, large growth in revenues will still have limited upside to its stock price.

We currently have a Trefis price estimate of $24.04 for Cisco’s stock, about 14% above the current market price of $21.12.

Growth in Network Security Market

Data security has become crucial for enterprises globally with the challenge of managing huge amounts of data and threats from hackers stealing data. Research firm IDC forecasts the global network security market, that includes firewalls, VPNs, intrusion prevention and detection, and multi-purpose security known as unified threat management, will grow to $8.2 billion in revenues in 2011, which is 8% more than 2010 revenues. The majority of this growth is expected to come from sales of hypervisor-ready solutions for virtualization and Software-as-a-Service (SaaS). ^[1]

Integration of Network Security with Router Products

Cisco offers integrated security solutions that are based on secure, multi-service platforms for all market segments. Cisco is coming up with new VPN modules which will be integrated with a variety of its routing platforms. This means Cisco will have to bear lower costs in terms of marketing its security products and will benefit from additional revenues.

Trefis Community Forecast

Network security & other products account for around 9% of Cisco’s stock price according to our estimates. Hence changes in revenues from this division will have limited impact on Cisco’s stock price.

The Trefis community predicts that Cisco’s network security revenues will increase from $2.2 billion in 2010 to $3.6 billion by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from $2.1 billion in 2010 to $3.1 billion during the same period. The member estimates imply slight upside potential to the Trefis price estimate.

Our complete analysis for Cisco’s stock is here.

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1. Good times projected for network security market in 2011, Networkworld.com, Jan 4, 2011 [↩]