Three Reasons Cisco Will Stay King of Routers

Includes: CSCO, JNPR
by: Trefis
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Trefis analysis for Cisco (NASDAQ:CSCO). Click to see full analysis.

Cisco competes with Juniper (NYSE:JNPR) in the router business and has the leading market share in all three categories of routers (enterprise, core, edge). Cisco sells routers primarily to large businesses and internet service providers that use them to manage the flow of data (such as emails) throughout their networks or through the internet.

Below we highlight the significance of the router business for Cisco’s stock, the trend in Cisco’s router market share and how IP data growth will drive demand for routers.

More than a $20 billion business

We estimate that Cisco’s router business constitutes more than $20 billion of Cisco’s value, which implies that about 15% of the $23 Trefis price estimate for Cisco’s stock is from routers. The significance of Cisco’s router business is attributable to the company’s high market share in all three router markets (enterprise, core and edge) and the size of the combined router market which was about $12 billion in 2009.

Cisco is the market share leader in routers

Cisco’s market share in enterprise routers has declined from about 75% in 2005 to about 69% in 2009. Despite the decline, it is still holds much higher share than its primary competitor Juniper which has only about 3% market share.

Cisco has about 53% and 47% market share in the core and edge router markets respectively. In recent years, Cisco’s market share has declined slightly primarily due to competition from Juniper.

We believe that Cisco will maintain its router market share across all three router markets for the following reasons:

1) Cisco’s large scale and wide distribution network is tough for competitors to match

2) Cisco makes and sells routers ranging from the very high-end to low-end, and thus can satisfy all networking needs of enterprises

3) Cisco enjoys an excellent brand reputation in the industry and has established relationships with its customers

IP traffic growth will drive routers market

We expect that global IP data traffic will continue to grow at a rapid pace which will maintain demand for Cisco’s routers. The company estimates that global IP traffic will grow at an annualized rate of about 40% over the next 4 years with video constituting nearly 60% of all consumer data on the internet by 2013.

You can modify our forecasts for Cisco’s router market share above to see how much the Cisco’s stock depends on the company’s market share in routers.

Disclosure: No positions.