I went on Kudlow’s show on CNBC last night to discuss the new Cisco (CSCO) announcement that, as CSCO put it, “will change the Internet forever.” I mentioned that this was a classic “sell the news” reaction with CSCO stock falling off into the close. Although I didn’t note, CSCO stock had had a nice rise going into this so some profit-taking is very normal and the stock is still significantly higher than where it was a few weeks ago.
I buy into the hype. I do think CSCO’s CRS-3 will change the Internet. Everyone was saying they thought CSCO would put out some new iPhone-like product for consumers so that was why the market was supposedly disappointed. This is far bigger. Think about what this will eventually mean: the dream is finally beginning to come true: a world where everywhere you go you are connected to the Internet, all the time, at super high speeds. It won’t happen tomorrow, but it's getting there and the CRS-3 will be leading the charge. Here are the initial companies that I think will be long-term beneficiaries:
Amazon (AMZN) – They are the leaders in outsourced cloud computing. The Internet will finally behave as if it were one huge desktop computer with everyone’s computing device becoming mere terminals facing the cloud. Because all data/video/media is instants away from your computing device via the Internet there will be less need for desktop storage and more need for cloud computing and applications.
Apple (AAPL) – The iPad might become their primary business, with the iTunes store being a much more friendly way to get all things media than it currently is (it still takes me an hour to download most movies, sometimes 3 hours). AAPL is almost permanently cheap: when you back out the cash they trade for, about 16 times earnings and about 12 times next year’s earnings. These earnings will experience massive growth because of a faster Internet.
Netflix (NFLX) – I’ve always hated the NFLX model. I can’t stand mailing things and I lose the envelopes, etc. But have no fear: now you can download all your movies within minutes. NFLX might be the biggest initial beneficiary of CSCO’s new router.
EMC (EMC) – Someone has to store all of this multimedia that’s going to be coursing all through the veins of the web. Basically, data has to be sped up from end-to-end: storage, router, bandwidth, computer. EMC is the storage but only if they use:
STEC (STEC) – The STEC Zeus solid state drives that EMC uses are about 40x faster than alternatives. STEC is the primary solid state drive maker that EMC uses, and trades for about 5x earnings when you back out the $2.50 a share in cash. (Disclosure: I own STEC).
AT&T (T) – AT&T had it all: the biggest network, the iPhone, etc. But now they are getting clogged. I can barely make a phone call in NYC using an AT&T phone. I had to get a Verizon (VZ) phone for my apartment and for those trips up the FDR Drive where T has a dead zone. But T is already testing the new CSCO routers and will be able to traffic cop the video/iPhone data that is presumably clogging things. Once unclogged, I expect T to zoom. VZ and Sprint (S) will also benefit, but T sticks out in my mind the most.
Polycom (PLCM) – the leader in video conferencing. A faster Internet will benefit all video conference companies. I think ultimately PLCM could be an acquisition target for Juniper (JNPR) (or Oracle (ORCL), as they continue to break into every aspect of enterprise computing).
Google (GOOG) – YouTube will become higher quality and faster. While CSCO is trying to speed up the backbone, GOOG is trying to wire up the last mile and build a high speed fiber network getting WiFi in selected cities. The data is going to go from EMC/CSCO/GOOG into your iPad. I can download and watch movies while riding a bus to work.
If you can think of other beneficiaries, please put them in the comments.
Disclosure: Long STEC