Cisco Stares Into Traditional Set-Top Box Black Hole But It Just Doesn’t Matter

Johnny doesn't sweat the set-top

Cisco released third quarter results recently with lowered guidance leading us to lower our forecasts and price estimate for Cisco’s stock to $24.04, which is about 23% above current market price.

Cisco competes with Juniper, Alcatel-Lucent and Tellabs in the routing and switching businesses.

We recently published an article discussing how weak public sector demand is affecting Cisco. However, Cisco is also facing dramatic declines in orders from cable providers, especially in set-top box business.

We currently forecast flat market share for Cisco in the set-top box business through the Trefis forecast period. Using our charts, if Cisco were to leave this business altogether by 2016, and market share drops from around 9% to 0%, this reduces our price estimate by 5%.

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North America Set-Top Box Weakness

Traditional set-top box orders from North American accounted for about 50% ^[] of all set-top box orders in the recent quarter and suffered a massive decline of 40% ^[] in Q1 2011 vs. last year.

In addition to slowing spending, lower cost competitors are making significant inroads into this business.

A Need to Worry?

We don’t think that investors should be too much concerned about Cisco’s set-top box business. This business constitutes only about 4.3% to Cisco’s stock based on our estimates. Moreover, the company has stated that it is only witnessing declines in traditional set-top box business while its IP set-top box business is doing well.

As Cisco positions itself better for future by transitioning its business to focus more on new generation set-top boxes, the effect of a decline in the traditional set-top box will be limited.

The key for investors will be to focus on the new generation set-top boxes and the switches and routers business makes up 27% and 16% of Cisco’s value, respectively.

You can see the complete $24.04 Trefis price estimate for Cisco’s stock here.

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