Is networking giant Cisco Systems (NASDAQ:CSCO) a year or two away from shrinking margins? It's too soon to call.
Yesterday, Cisco confirmed that it has suspended copyright litigation against Huawei Technologies Co. Ltd of China, which has agreed to stop selling products disputed in the lawsuit. Using low-cost Chinese labor from engineering to production, Huawei expects to have a significant pricing advantage as it sells networking products around the world.
Indeed, competitors like Huawei have clearly stated that their competitive thrust will be through pricing and strong products. As it stands, Cisco's gross margins -- 71% in the third quarter, up from 62.1% a year ago -- are eye-popping. It is precisely these margins that have Asian competitors thinking they can gain market share.
It won't be easy. Huawei and other Asian manufacturers face roadblocks in their quest to wrest market share from Cisco. For one, Congress is debating import duties for Chinese products, which, if imposed, would undermine Huawei's pricing advantage -- though only in the U.S. The same can be said should the G7 get their way and China further boost the value of its currency.
What's more, equipment uptime and time-to-repair will likely hamper early sales -- especially to companies of any size. CIOs can hardly take credit for saving networking money if the company's website or network is down. For now, Cisco is the safe bet and it will take time for that image to be tarnish -- if it ever does.
And with $8.4 billion in cash and no debt, Cisco has staying power. Add in cash equivalents and investments and that cash hoard swells to $20.3 billion.
Apparently, the market considers Cisco safe. With a total capitalization of $138 billion and a P/E ratio appraching 40, investors are either dismissing or overlooking this potential threat to margins, betting instead that the leader continues to innovate, reduce costs, and maintain margins.
To prove them wrong Hwawei and others will have to prove they can hurt the champ of networking.
W.D. Crotty welcomes your comments at [email protected] .
