Stocks Fools Love
Cisco Systems

By LouAnn Lofton (TMF Lou2)
February 8, 2000

Trading at $125 3/16 as of February 7, 2000

Roses are Red
Violets are Blue
Cisco, my Sweet
I Love You.
My Valentine is the love of my investing life. It's held that special place in my heart (and my portfolio) for a long time now. My love with my Valentine isn't new. It's not the latest dotcom, but it does make my pulse quicken and my stomach flutter.

My love doesn't disappoint me. It just keeps giving and giving, while I stare at my computer monitor wide-eyed and unbelieving at what I see. I know my love inside and out. I trust it. I love Cisco Systems (Nasdaq: CSCO), and now I'll tell you why, dear reader.

Do you send and receive e-mail? Are the computers in your office linked up? Are they able to communicate not only with each other but with computers in the outside world? What about your home computer? Can you hop on and chew the fat with Aunt Mary in Omaha, via e-mail or one of the several "instant messaging" technologies available?

Did you answer yes to any of those questions? I bet you did, given that you're reading this now. Somehow, somewhere, there are machines connecting your computer to mine, your business to another, you to your friends and family, and, of course, you to me.

Ever take a moment to wonder how that happens and who makes it happen? It'd be difficult for me to get into the intricacies of networking and routing and packet switching here, but I can tell you who makes it happen: Cisco Systems.

Cisco is the worldwide leader in networking solutions for the Internet. If you believe in the Internet and its viability and growth, you'd have to be a fool (lowercase f) not to believe in Cisco. Internet traffic doubles about every 100 days. Think about that for a second. That's pretty amazing. And Cisco is the big dog on the porch, poised to pounce on that opportunity.

Cisco's story is an amazing one. Founded in 1984 by an enterprising husband and wife who wanted to connect up some computers at Stanford University, the company has exploded from a lil' niche company with $69 million in revenues in 1990 to a behemoth with revenues last year of $12.2 billion. Wow, if that ain't growth, then what is? And if trends continue, there's no stopping that growth. Do you think the Internet will shrink or expand from here on out? Only one answer seems to make sense to me.

What we're looking forward to is an Internet that will deliver data, voice, and video to you in the blink of an eye. Up until now, we've mostly seen only data transmitted -- bringing to consumers what is today recognized as common Internet content, but the trend to voice and video is quickly coming. The same lines that now carry only data will soon support voice and video. One of the main trends that is developing is voice over data lines, because data lines are cheaper to put in and maintain. Also, broadband Internet protocol (IP) networks can carry vast amounts of voice traffic at almost no extra cost.

Cisco stands to benefit from this trend, since it controls an overwhelming majority of the data backbone. The move for Cisco from data to voice-over-data will not be difficult. Lucent (NYSE: LU), sometimes touted as Cisco's biggest threat, will have a harder go at things, as they have to convert their old Ma Bell voice lines to data. And as we've seen recently, Lucent has its own internal inventory issues to work out, as well as figuring out how to handle all that debt they took on with the acquisition of Ascend.

Cisco stands like a shining star at the precipice of the Internet of tomorrow. The one potentially weak link in the company's strategy is wireless. Cisco's addressing this, though, by partnering with Motorola (NYSE: MOT), Nokia (NYSE: NOK), and Ericsson (Nasdaq: ERICY), as well as making acquisitions of smaller companies such as Clarity Wireless.

Cisco grows in large part through acquisitions. From 1993 until the present, Cisco has bought up 50 companies. Fifty! CEO John Chambers believes that Cisco's growth and future depend on such acquisitions, and he doesn't hesitate to pay what some consider outrageous prices to get what he wants. Some eyebrows were raised back in August, for instance, when Cisco announced its purchase of Cerant for $6.9 billion. But before you doubt Chambers, take a deep breath and look at a chart of Cisco's historical performance. I say, believe the man.

Or, better yet, believe the numbers. Looking at Cisco's last 10-Q, we find a company with solid numbers, strong growth, and no debt. All those acquisitions and still no debt! Unbelievable. We find gross margins of 64.8%, net margins of 21.6%, and sales growth compared to the same period the year before of 49.3%. Cisco sports a Foolish flow ratio of 1.03 (this means the company is managing its inventory efficiently -- not much stuff is sitting around in warehouses unsold) and a return on equity of 19%. Not to mention the fact that Cisco has experienced 42.6% earnings growth over the last five years.

Can that continue? I don't have a crystal ball, but I will bet (and I have, with my investment dollars) that the Internet will continue to grow, and that Cisco and John Chambers will continue to do what they've been doing since 1984. There are no reasons to believe anything else. My money's on Cisco.

John Chambers once said, "It is our goal to be the largest computer player ever in terms of changing the way people work, live, play and learn." Based on everything I've read about the company, its managerial efficiency, its sales growth, and the market that lays before it waiting to be conquered, I'd have to say my Valentine is well on its way to that goal. How could I not be in love with this company?

Next: Net Perceptions, Inc. »

Cisco Company Information:
Trades on the Nasdaq under symbol CSCO
Website: www.cisco.com
Cisco is a Motley Fool NOW 50 Index Stock

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