The Associated Press recently went to great lengths to describe all of the reasons that Cisco (CSCO) would do well in the coming quarters. Increased traffic over the internet due to video and VoIP would increase demand for the company’s core products. The AP went so far as to round up some experts to support its position: "Cisco would like to see video delivered to every device everywhere," said Zeus Kerravala, a network infrastructure analyst with Yankee Group. "If you’re looking to something to create the next wave of network upgrades, video is front and center. It drives bandwidth like we’ve never seen before."
The market for routers and switches is growing rapidly. That is beyond argument. And, most of Cisco’s competitors like Redback (RBAK) and Juniper (JNPR) are much smaller companies.
So, where does Bank of America get off dropping Cisco from "buy" to "neutral"? B of A’s argument is that “growth will slow over the next few quarters as the salesperson headcount benefit is appreciated, there is less scope for share gains, and margins are at peak.” Prudential also downgraded Cisco’s shares.
Cisco’s shares moved down about 3% on the analyst actions but still trade near their 52-week high of $28.99.
Someone said that "the trend is your friend". Of course, the need for broadband providers around the world to upgrade their networks to handle more traffic is a significant benefit for Cisco. Analysts can’t always be right.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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