Recovering IT Spend Will Benefit Cisco's Enterprise Router Business

Apr. 4.10 | About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO), which competes with Juniper

(NYSE:JNPR) in the networking equipment business, witnessed significant declines in its enterprise router revenues in 2009. We estimate that Cisco’s revenue decline mirrors the 28% decline in the global enterprise router market (as estimated by Infonetics Research).

The decline in the global enterprise router market is attributable to IT budget cuts and delays in infrastructure upgrade projects, resulting from the slowing economy and customers opting for low cost equipment. According to Infonetics Research, however, the enterprise router market is showing signs of rebound from recession.

Below we discuss the significance of enterprise routers for Cisco, why we expect the enterprise router market to rise, and how this impacts Cisco’s stock.

Routers Are 16% of Cisco’s Stock; Enterprise Routers Contribute the Most

We estimate that routers constitute about 16% of the $23 Trefis price estimate for Cisco’s stock. This amounts to nearly $22 billion of value based on our estimate of $137 billion Cisco’s value. Enterprise routers constitute about 40% of this value, making it a crucial sub-segment for the company. Cisco is the leader in the enterprise market with close to 69% market share.

Enterprise Router Market to Grow At Low Double Digits for Next Two Years

A recent release by Infonetics Research states that the enterprise router market is on an upswing and registered about 10% sequential growth in the last quarter of 2009. We estimate that the market will register a year-on-year growth of around 10-15% in 2010 and 2011, and revert back to the higher 2008 levels by 2012.

Gartner, a market research firm, expects global IT spend to grow by 4.6% in 2010, offsetting the 2009 decline attributable to the slowing economy. Since the enterprise router market declined far more (about 28%) than overall IT spending, we believe it will take a few years before the router market surpasses its 2008 levels.

You can modify our forecasts above to see the impact on Cisco’s stock if 1) the enterprise router market grows faster than we forecast 2) Cisco’s enterprise router market share were to decline rather than remain at current levels as we forecast.

For additional analysis and forecasts, here is our complete model for Cisco’s stock.

Disclosure: No positions.