Is Facebook worth more than Silicon Valley icon Cisco Systems (NASDAQ: CSCO)? The market seems to think so. Facebook may launch an IPO in the spring that would raise $10 billion and value the company at $100 billion. Cisco’s current market cap is $96.8 billion. Although Cisco has not grown rapidly in recent quarters, its stability and earnings make it worth much more than the social network.
Cisco’s revenue last year was $43.2 billion. The company made $6.5 billion. That is an extraordinary margin, even for a firm that has struggled with the mix of its businesses. Cisco recently lowered its three-year revenue forecast to 5% to 7%. Part of that caution in because CEO John Chambers overexpanded Cisco well beyond its core router business. Several of the operations it bought fit poorly with Cisco’s primary operations and have low margins. Chambers has begun to shed those companies or cut costs at them. In fact, Cisco said it would fire 10,000 people to improve profits.
Cisco’s enterprise value actually is much less than its market cap. It has $42 billion in cash on its balance sheet — money that could be used for dividends, buybacks or strategic purchases.
Facebook is in a business that is more competitive than most of Cisco’s operations. The firm has to compete with the new Google+ initiative and a group of companies that want a part of the online ad and music businesses Facebook has entered.
Facebook is expected to have revenue of $4.3 billion this year, a bit more than double the 2010 figure. Most of that income is from advertising sales. Although its display inventory is larger than rivals Microsoft (NASDAQ: MSFT), Yahoo! (NASDAQ: YHOO) and Aol (NYSE: AOL), the three companies have increased their efforts to hold market share. That means Facebook will have a challenge as it tries to produce revenue from its 750 million users.
Even if Facebook’s revenue doubles, it will be nowhere as large a company as Cisco — at least not for nearly a decade. And if Google is any indication, that doubling rate will last only a few years.
Facebook may be more attractive than Cisco because of its growth, but the chances it can reach Cisco’s revenue and profits are only modest.
Douglas A. McIntyre
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