Cisco reaps rewards of Net investment spree

The firm's stock reaches an all-time high, riding on Wall Street's current obsession with companies that build the hardware and software that make up the nation's high-speed networks.

Scott Ard Former Editor in Chief, CNET
CNET former Editor in Chief Scott Ard has been a journalist for more than 20 years and an early tech adopter for even longer. Those two passions led him to editing one of the first tech sections for a daily newspaper in the mid 1990s, and to joining CNET part-time in 1996 and full-time a few years later.
Scott Ard
3 min read
Is Cisco Systems the new king of Silicon Valley?

The company's stock reached an all-time high today as it rides Wall Street's current obsession with firms that build the hardware and software that make up the nation's high-speed networks. That follows some bragging rights Cisco claimed last week when it displaced chip manufacturer Intel as the most valuable firm in Silicon Valley, with a market capitalization of about $280 billion.

Cisco's steadily climbing stock price coincides with a series of successes for networking upstarts such as Juniper Networks, Sycamore Networks and Foundry Networks, all of which recently experienced wildly successful initial public offerings.

Cisco shares, which gained 19 cents today to close at 84.19, have surged 146 percent in the past year. Earlier in the day the shares traded as high as 86.19.

The recent jump in Cisco shares caps a stunning decade for the company, which went public in 1990 when it sold 2.8 million shares for $18. Since then the stock has had eight splits, one each year except 1995. Six of the splits were 2 for 1 and two splits were 3 for 2.

As a result, an investor who purchased 100 shares in 1990 and has not sold any would now be holding 14,400 shares worth $1.2 million, a return of about 68,000 percent.

Older firms, such as a reinvigorated Nortel Networks, also are reaping the benefits of the market boom. Nortel's market capitalization has risen to more than $100 billion in recent days.

The reasons for interest in Cisco, Nortel and upstarts like Juniper are easy to explain: No matter who wins the Internet content and e-commerce wars, the networks that make these businesses run will always need more innovative equipment to grow.

Essentially, these companies will serve as the "arms dealers" as Internet-based technologies become more pervasive.

Investor enthusiasm for Cisco and others can also be read as a sign of a shift in the technology world from the PC to Internet-based networks. The growing market for application service providers (ASPs), as well as the increased use of Internet devices, such as 3Com's PalmPilot, underscores this shift.

Following recent Cisco stock chartstock runs, Cisco, Nortel and Lucent Technologies--the three largest manufacturers in North America--have a combined value of more than $600 billion. But executives choose to paint their financial fortunes as part of a larger boom.

Lucent Chief Executive Rich McGinn in a recent interview with CNET News.com said the networking firms are only one piece of the Internet puzzle. "When I think of the Internet, I think of it in two parts. Certainly, there's the public network and the World Wide Web and so on, but I also think there are those IT companies who are enabling the Internet as much as Lucent and Cisco and Nortel."

The need for telecommunications firms to upgrade their systems to handle voice and data traffic over a single network has also helped boost Cisco and its competitors.

"There's going to be a huge investment cycle," said Elias Moosa, an analyst at Thomas Weisel. There is "so much at stake, so much money to be made" Moosa added, that the telecom companies "are going to spend more than we can imagine."

Various analyst estimates place spending on telecommunications equipment at $60 billion to $100 billion over the next few years.

To keep up with demand for its products, Cisco added more than 2,800 employees last quarter, giving it a total of 23,500, Moosa said. The company plans to hire another "couple thousand" this quarter.

Cisco also faces some pitfalls in the market, however. Networks run by some of the largest telecommunications firms are often built with technology that is tested for extended periods of time, to prevent any type of outages or network failure--something the big firms can't risk.

For example, Cisco equipment was the primary cause of a significant outage on AT&T's business network in April of 1998.