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Investment Overview for Cisco (NASDAQ:CSCO)
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Below are key drivers of Cisco's value that present opportunities for upside or downside to the current Trefis price estimate for Cisco:
Network Switches
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Cisco Switches Market Share: With a market share of close to 75%, Cisco has a dominant position in the switching market.The market size for the bottom layer switches is more than the combined size for routers (core, enterprise and edge) at an estimated $18 billion for 2012. Due to its longstanding customer relationships and dominant position in the industry, we see very little declines in Cisco's market share and expect it to remain above 70% throughout our forecast period. However, if increasing competition eats away at its market share and causes it to decline to about 60% by the end of our forecast period, we could see a potential downside of about 5% to our price estimate. On the other hand, if Cisco leverages its dominant position and wide enterprise reach to further bolster its share to 85%, there could be an upside of a similar nature to our price estimate for Cisco.
Routers
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Cisco Edge Router Market Share: We forecast Cisco's share in the edge router market to moderately decrease from an estimated 53% in 2012 to 50% by the end of our forecast period. However, there could be a downside of about 2% to our price estimate if Cisco were to see its market share decrease to 40% by end of our forecast period. On the other hand, if the market share were to increase to around 60% there could be a similar minor upside.
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Enterprise Router Market Share: We forecast Cisco's share in the enterprise router market to only moderately decrease from an estimated 83% in 2012 to about 80% by the end of our forecast period. Given its high share in this segment, rising competition can have a negative impact on our price estimate for Cisco. There could be a potential downside of about 1% to our price estimate if Cisco were to see its market share decline by 1o percentage points by the end of our forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Cisco at the top of the page.
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Cisco designs and sells networking and communications technology and services. It creates networking equipment such as switches and routers used primarily by businesses and Internet service providers to route data such as emails, videos, files and other digital communication. For example, an email that you send to a distant friend travels through various switches and routers made by companies like Cisco, Juniper and Alcatel-Lucent along the path to its destination.
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Network Switches
Over the past four years, Cisco has had close to 75% market share in the market for Switches, which is expected to be about $18 billion in 2012. The switching market comprises of both Bottom Layer Switches and Top Layer Switches. Bottom Layer Switches are the most prevalent types of switches found within networks and used for basic routing of data within the network. The market for Bottom Layer Switches alone is bigger than the overall router market.
Network Services
In addition to networking hardware, Cisco provides maintenance and support services to its customers to help them fix problems that occur with networking equipment. Cisco's network service revenues and profits are dependent on the installed base of Cisco switch and router equipment.
Routers
Of the various router segments, Cisco has a bigger presence in the enterprise router market owing to its longstanding relationship with enterprises and their willingness to let one vendor handle all aspects of their network, as opposed to service providers. Cisco commands more than 80% of this market and we expect the company to see only a slight decline in its market share, going forward. Enterprise Routers are used by medium and large businesses for their own data routing needs. Core Routers and Edge Routers, on the other hand, are used by Internet Service Providers to route data traffic from network to network.
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Escalating Mobile Data Traffic Driving Router and Switch Sales
A study released by Cisco in early 2013 estimated that global mobile data traffic grew by 70% in 2012 and had at least doubled each year over the previous four years. Going forward, it expects to see the figure grow 13-fold between 2012 and 2017. Most of that rapid growth will be fueled by the burgeoning demand for video, which is expected to account for almost two-thirds of all mobile traffic by 2017.
Growing penetration of mobile devices such as smartphones and tablets is driving the demand for mobile data through the roof, causing wireless service providers to look for cost-effective ways to upgrade their networks in order to support and monetize the growing traffic. Cisco, which has a dominant position in the networking market, is positioned well with its strong customer relationships to benefit from the growing demand for network equipment in the long run.
Alcatel Lucent's re-entry into core router space
Historically, Cisco and Juniper have had a virtually duopolistic control over the core router market, with a more than 80% combined market share at all times. However, that is now threatened by the re-entry of Alcatel Lucent in the core router space in 2012. Despite not having a core routing solution until now, Alcatel Lucent has steadily climbed the edge routing charts from being just an entrant in 2003 to surpassing Juniper as the number 2 vendor in the industry in 2009-10. With about 24% market share of the edge routing industry, Alcatel Lucent has done well to find a place in many networks and can now use that as a leverage to push its core routers as well.
Also, armed with an end-to-end solution, Alcatel Lucent can now compete with Cisco for many businesses in the edge routing industry that prefer such solutions, hurting Cisco's edge routing market share even further.
Hardware to software shift in networking
There is going to be an industry wide shift in demand from hardware networking solutions to software-based ones in the long run. This poses an interesting challenge to traditional hardware-based players such as Cisco and Juniper. VMware, for example, is a threat considering its virtualisation expertise and its recent acquisition of Nicira, a software-based networking company. Cloud-computing solutions are also driving this trend. Cisco recently launched its own cloud-based routing and WAN optimization platform for the enterprise, called the Cisco Cloud Connected Solution to address the changing trend.
BYOD movement
The Bring Your Own Device (BYOD) movement is causing corporates to increase their allocation of IT budgets towards enhancing network security. As employees bring their own mobile devices such as the iProducts as well as Android based smartphones and tablets to work, enterprises feel an increasing need to bolster their network security to effectively manage and support all devices while mitigating the threat of an outside attack. Addressing the BYOD movement presents Cisco with an opportunity to increase security revenue as well as improve the demand for its routing and switching solutions.
IP Data Convergence
In recent years Cisco has increasingly focused on the convergence of IP data through digital video, IP telephony and web conferencing. Cisco has positioned itself to benefit from the ongoing transition of TV viewership to all digital services (e.g. digital cable) and the evolution of business communications from fixed line communication to IP based, video and web conferencing enabled communication.
Trefis Forecast Rationale for Cisco Core Router Market Share
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${forecast} represents Cisco's share of the global core router market revenues.
Core routers are primarily used by service providers, and as the name suggests, they sit at the core of a network. So far, Cisco and Juniper have had a near-duopolistic grip on the core router market, but competition is heating up with the entry of low-cost players such as Huawei and Alcatel Lucent's recently announced re-entry into the core router market.
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Cisco's market share in the core router space has mostly remained in the 50-60% range. It suffered a slight blow in 2004-05 when its market share had fallen down to about 45% but has since then recovered recovered almost all its market share, which stands at about 60% currently.
The primary reason for the loss in market share was Juniper's launch of an advanced core router which took away share from Cisco. The product was far superior to what Cisco could offer then and consequently it lost share. Cisco responded in late 2004 by launching its Carrier Routing System 1 (CRS-1) router which matched (and in some respects, was superior to) Juniper's product. This enabled Cisco to regain most of the lost market share.
However, maintaining a market share that is close to its all-time highs will be tough for Cisco, especially now that Alcatel Lucent has also announced core routers of its own. This is a potent threat for Cisco since Alcatel has an established line of edge routers in the industry and is the number two vendor in the segment after Cisco. It could therefore use its existing edge router relationships as leverage to gain a foothold in the core router market and then launch an assault on the Cisco-Juniper duopoly.
We therefore expect Cisco to lose some market share from its current peak to end up with about 55% core router share by the end of our forecast period.
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We considered the following three factors for our forecast:
Supporting Factors:
- New product launches from competitors Juniper Networks and Alcatel-Lucent might affect Cisco's technology edge
- Competitors are looking to launch newer, advanced products to counter Cisco's technical edge.
- Juniper Networks and Alcatel Lucent have both launched new core routers with higher throughput and better performance abilities.
- These products are expected to be more bandwidth efficient therefore help unclog the networks which are facing unprecedented demands because of IPTV, IP telephony and wireless data.
- Core router sales cycle is 12-18 months and so it will be interesting to see how these products affect Cisco's share in the next couple of years time.
Mitigating Factor:
- Cisco's large scale and wide distribution network is tough for competitors to match
- Cisco is by far the largest router manufacturer and has by far the best sales execution
- Since the early part of the decade, when Cisco looked like it was losing its way, the company has invested substantially in acquisitions and development of new products, and is better placed than most of its competitors.
- It has also undergone a restructuring in order to drive efficiency and increase focus on its core networking products.
- Cisco's primary offering, the CRS line is widely recognized as best-in-class
- As mentioned above, Cisco managed to regain most of the lost market share in core routers after the introduction of CRS-1
- Cisco has claimed that the CRS line is the only product in the marketplace engineered to address the massive surges in video traffic that are expected to flood IP networks
- It is thus designed to resolve the bandwidth challenges of the future as IPTV and IP telephony continue their scorching pace of growth.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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