Cisco (CSCO) released earnings last week and lowered its revenue guidance for next quarter as well as for its fiscal year 2011 based on a slowdown in public spending. Cisco competes with Juniper (JNPR), Alcatel-Lucent (ALU) and Tellabs (TLAB) in the routing and switching businesses.
We currently forecast that Cisco will maintain its dominant market share in excess of 70% for the routing and switching businesses, but if it lost 5% share in each of these businesses due to its higher exposure to the public sector, this would translate to around 4-5% downside to our lowered price estimate.
As a result of the company’s weaker guidance, we have lowered our price estimate for Cisco’s stock to $24.04, which is about 20% above the current market price.
Weak Public Sector Spending
Unlike its enterprise business, the public sector business has slowed considerably for Cisco. The company stated that for Q1 2011 fiscal year, public sector order growth was a modest 6% versus enterprise order growth of 16%, on a year over year basis. 
Most of this slowdown was caused by significant reductions in public spending. Facing budget deficits, the US, Japan and some Central European countries reined in its IT spending more than expected. Cisco stated that it will continue to face these challenges over the next few quarters, and we believe this holds negative implications for its market share outlook.
Market Share Outlook
As Cisco’s products tend to be more expensive compared to its competitors, public budget constraints will continue to hurt Cisco’s order growth in coming quarters as officials look for cheaper alternatives.
We estimate that about 20% of Cisco’s product revenues come from the public sector. According to industry analysts, Cisco has higher exposure to the government sector compared to its competitors. Therefore its higher relative dependence on public spending could result in combined market share losses if other segments continue to outpace public spending.
Currently we forecast a largely stable market share for Cisco’s routers and switches units. However, if its market share declined by 5% in both segments versus our expectations, our price estimate could see additional downside of 4% to 5%.In these charts, you can see how changes in market share forecasts impact our price estimates.
- Taken from latest earnings transcript
- Based on 22% order share figure mentioned in latest earnings transcript
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