|
What's next for the four horsemen?
|
 |
September 4, 2001: 1:06 p.m. ET
Are Cisco, EMC, Oracle and Sun buys yet?
By Pablo Galarza
|
NEW YORK (MONEY) - Not long ago, betting on the four horsemen of the New Economy -- Cisco Systems, Sun Microsystems, Oracle and EMC -- seemed a sure thing. And for a while, it was: As corporations raced to exploit the promise of e-commerce, sales of Cisco's routers, Sun's servers, Oracle's database software and EMC's storage systems surged. As recently as January, each firm crowed that long-term earnings growth of 30 percent a year or better was a cinch.
Now, however, the four horsemen have slowed from a rousing gallop to a lame trot. With the economy souring and tech spending drying up, each of the four stocks has sunk below $20 -- a level that seemed unimaginable a year ago. So: Are these bargain prices?
Cisco Systems
Led by the New Economy's supreme evangelist, CEO John Chambers, Cisco (CSCO: down $0.56 to $15.77, Research, Estimates) has vanquished nearly all its rivals in the business of selling equipment to build corporate networks.
With the rise of new telecom and dotcom upstarts, demand for Cisco gear seemed unquenchable. Sales more than doubled from 1998 to 2000, and Cisco briefly became the world's most valuable company, with a market capitalization of $574 billion.
Since then, Cisco's market cap has plunged by a mind-blowing $440 billion, vaporized along with all those dotcoms and telcos that had hungrily bought its routers.
With many smaller customers melting down, Cisco must now focus on selling its networking gear to large firms (currently 60 percent of its overall sales). Trouble is, this is a fairly mature market, likely to grow only 10 percent to 15 percent even in good times.
There's more opportunity in building networks that carry data at high speeds to and from urban areas. But that space is fraught with competition. And Cisco has already lost ground in another key business, high-end routers, where Juniper Networks has seized 38 percent of the market.
One bright spot: Cisco has no debt and $18 billion in cash, ensuring that it can survive a long downturn. But the stock is still pricey. Even at less than $20, it trades at 100 times next year's expected earnings.
Oracle
In the digital world, Oracle's (ORCL: down $0.13 to $12.08, Research, Estimates) database software functions as a high-tech filing system. The beauty of this business is the barrier to entry. As Kevin Landis of Firsthand Funds says, "Oracle's franchise is so strong because changing databases is a major pain." The database business is hugely profitable too, so Oracle has sumptuous gross margins of 72 percent.
At its peak, Oracle's market cap ballooned to $260 billion. Much of the excitement revolved around a suite of new software applications called 11i, which helps manage corporate departments such as human resources, sales and accounting. The rollout of these applications was expected to strengthen Oracle's position, since they'd work best in tandem with Oracle's database software.
| |
|
|
| |
|
Even if Oracle manages to grow 15 percent a year, the stock looks overpriced.
|
|
|
But rival products from PeopleSoft, SAP and Siebel are said to work better than 11i. And with Oracle trying to muscle in on their turf, these one-time partners have been steering customers to other database sellers, such as IBM and Microsoft. Sales of Oracle's application software dived 24 percent in the fourth quarter vs. the previous year, while rivals gained 27 percent. Equally worrisome is the fact that Oracle's database business, which contributes 38 percent of the firm's sales, was flat in that period.
In the long run, Wall Street foresees the database industry growing 15 percent a year, while applications software is expected to grow 23 percent. But even if Oracle manages to achieve that kind of growth, the stock looks overpriced. At $15, it trades at eight times sales -- higher than the three other horsemen. That leaves scant upside for shareholders, especially at a time when business is stagnating.
Sun Microsystems
You probably remember Sun's (SUNW: down $0.50 to $10.95, Research, Estimates) ads exulting that it was the dot in dotcom. This was clearly hyperbolic. But Sun's servers -- souped-up computers that ho st Web pages and run complex programs like databases -- were indeed the hardware of choice for dotcoms and big businesses. By 2000, Sun dominated the U.S. server market and was No. 2 overseas.
But with telecom's collapse, Sun's bubble burst. Sanford Bernstein explains that nearly two-thirds of Sun's growth in 2000 was attributable to the telecom industry. Without this fuel, Sun's profits fell 16 percent in the fiscal year ended in June, while operating margins slid from 16.4 percent to 10 percent.
Adding to these woes, the announcement that a new product line would be launched led customers to hold off on buying Sun's existing servers. Meanwhile, low-end servers sold by rivals like Dell further loosened Sun's stranglehold on this business. And in late-August, Sun announced that it would actually lose money this quarter.
Looking ahead, the market for servers is now expected to grow only 8 percent to 10 percent a year. It's hard to see how Sun, which already boasts about half this market, can grow much faster than the industry as a whole. As for Sun's stock, which crashed to less than $11 after its more recent gloomy forecast, it is still pricey, but getting down to more buyable levels: Sanford Bernstein's Toni Sacconaghi, who rightly advised selling Sun at $35 last spring, sees $12 to $15 as an attractive entry point.
EMC
The digital revolution has created an avalanche of data, and EMC's (EMC: down $0.51 to $14.95, Research, Estimates) storage systems are like vast warehouses where that data is kept. In the past year alone, customers like banks and insurers gobbled up $9.3 billion worth of EMC gear to store crucial records and other information.
But the tech-spending slowdown has hit EMC hard. To make matters worse, competitors like IBM, Sun and Hewlett-Packard have reinvigorated their own storage products and dragged EMC into a price war that has crimped profits.
Meanwhile, smaller foes like Network Appliance and Veritas are challenging EMC with cheap alternatives to its million-dollar systems. Skeptics also note that hardware, which makes up 66 percent of EMC's sales, is becoming a commodity. The real value, they argue, lies in the software programs that run these data warehouses. Amid all this skepticism, EMC's stock has tumbled more than 80 percent.
At these depressed levels, EMC is the most attractive of the four horsemen. Despite the company's recent troubles, storage remains the fastest-growing niche in tech. A study by the University of California at Berkeley estimates that the world now produces 1.5 billion terabytes (that's 1.5 trillion bits) of data annually. That suggests the industry can keep growing at a robust clip of 25 percent to 35 percent a year. As the market leader, EMC should collect a big piece of that action.
EMC is also moving aggressively into faster-growing territory, devoting 75 percent of its $1 billion research-and-development budget to software applications. Meanwhile, the firm's obsession with customer satisfaction has earned it a 99 percent customer retention rate, giving it a fairly reliable revenue stream.
For a company this strong and well positioned, EMC is surprisingly cheap. At $17, it trades at four times last year's sales and 41 times estimated earnings for 2002. EMC also has a healthy balance sheet and $5 billion in cash. In today's tech climate, that adds up to a buying opportunity. 
* Disclaimer
|
|
|
Track your stocks
|
Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney
|
|
|
|
 |
|
