Cisco’s Switches Market Share Outlook for 2011

Cisco (NASDAQ:CSCO) competes with Juniper (NYSE:JNPR) and Alcatel-Lucent in the network equipment business. The company has been the leading global vendor commanding substantial market share in several router and switches markets.

The company’s stock suffered a significant drop after its most recent earnings release due to weak guidance for 2011. We have previously asserted that Cisco’s stock might still be worth a buy due to broader trend of high data usage that will continue to drive demand for Cisco’s products (see Cisco is Still a $24 Stock). Our price estimate for Cisco stands at $24.04.

See our full analysis and $24.04 price estimate for Cisco

But there is another risk to Cisco, as we’ve previously examined (see Multi-Vendor Approach Could Shake Cisco’s Market Share). It is possible that enterprises could resort to a multi-vendor approach in the future, putting pressure on Cisco’s market share (although we are yet to see material evidence of this type of shift). Despite the potential share loss, we believe the impact to Cisco’s stock value is relatively insignificant.

Cisco Could Lose Switches Market Share in 2011 – Oppenheimer & Co.

Oppenheimer & Co. states that data center is the fastest growing segment of switching and is estimated to account for 51% of overall market growth from 2009 to 2011 ^[1] According to the company, Cisco’s potential problems stem from the fact that, within the data center segment, demand is primarily increasing for specialized switches optimized for dense virtualization and low latency. ^[1] This might create an opportunity for smaller vendors that specialize in these niches. Continued softness indicated by Cisco’s guidance could adversely affect Cisco’s ASPs (average selling prices) as well, further eroding market share.

Downside Limited if Predictions are Right

Oppenheimer estimates Cisco’s 2011 market share of switches to be about 72%, which is close to our estimates for Cisco’s share in bottom layer switches (which are by-far the major proportion of overall switching market). ^[1] However, the firm estimates that this could fall to 69% in 2011. ^[1] This scenario would imply 2-3% downside to our price estimate for Cisco. If the market share losses continue beyond 2011 this downside could be closer to 5%, although we note that this would still leave our price estimate above market price.

Drag the trend line in the modifiable chart above to see how changes in Cisco’s bottom layer switch market share could affect the company’s stock value.

1. Cisco losing steam in data center switching?, Sep 14 2010 [↩] [↩] [↩] [↩]