The rising tide lifts all boats, so the cliché goes. Yet Santa Claus and Rudolf the Red Nosed Broker have been more than generous to the ideas I have recommended in this column this winter.

So Goldman Sachs has risen 15 points to 177 since I recommended the shares in this column three weeks ago. Schlumberger has soared from 62 to 70 in the past month. Microsoft was 18 six months ago and almost 31 now. The Russia Fund was up 10 per cent last week alone. Time may not heal all wounds in life but a turbo-charged bull market sure helps the healing process in my post Lehman nervous system.

Cisco Systems, or CSCO, has been a spectacular performance since its shares bottomed in March at 15 to almost 25 now. Yet CSCO, the ultimate ten bagger Big Tech Gorilla Game share in the 1990’s, has been a heart breaker for most of the past decade, declining by a third.

After all, Cisco’s Ethernet routers and switches, the backbone of its franchise with a 70 per cent market share, transitioned from a hyper-growth business to a legacy hardware business, akin to IBM’s mainframes, Dell’s PC servers, even, horror of horrors, Hewlett’s printers. As the Silicon Valley silos crumble, HP has acquired 3 Com to compete with Cisco, IBM has partnered with Juniper’s high speed networks and Huawei has followed China Inc’s flag across the emerging markets. Yet Cisco Systems is the Madonna of Silicon Valley, a brand that continually reinvents itself and 2009 could well be the most transformational year for CSCO since it first went public so long ago in a galaxy far, far away.

It is unfortunate that the financial markets are so obsessed with the admittedly slow growth metrics of Cisco’s Ethernet switch business (one third of global revenues) rather than the new high growth businesses it has assembled via more than 100 acquisitions in the past decade alone.

The takeovers of the Norwegian videoconference software vendor Tandberg, the Email software specialist Post Path, the corporate instant messaging software vendor Jabber and office communications software vendor, Web Ex, the cable TV set up box vendor, Scientific Atalanta (a jumbo deal at $6.9 billion) and, above all, the wireless data network firm Starents Networks have created the strategic ballast for the New Cisco that will redefine the frontiers of a cloud computing, virtualisation world.

While Cisco shares have soared because economic recovery correlates well with telecom carrier spending on networking equipment, I am convinced that New Cisco, with its footprints across entire new technology categories, is an embryonic gorilla game winner of the next decade. Video will dominate the global data networks, as any Youtube enthusiast will agree. I am convinced that Cisco’s Telepresence videoconferencing product suite will enter market folklore on the same legendary scale as MS-DOS, the Pentium chip, the Netscape browser and the Googleplex, literally change the way we work, fly, play and meet. Data traffic on mobile network is destined to double every year for the next decade. Data over wireless will flow seamlessly at unimaginable speeds into laptops, smartphones and mobile phones.

The New Cisco will once again be the growth stock as it was in the 1990’s, a reincarnated Tech Gorilla for the next decade. This is all the more true since Internet. Protocol networking penetration in the emerging markets is going to explode, providing a steroid shot to Cisco’s non-US business.

Cisco could well grow its top line by 15-17 per cent, a probability I do not think is priced in even at current elevated market levels. Cloud computing, the inter-connection of data centres and networks in cyberspace, could prove as revolutionary to Cisco’s business model as the invention of the high speed terabit router , the rise of the mobile Internet and the convergence of voice, data and video traffic. Storage, Email computing, video conferring, wireless Internet, data centre security, virtualisation software, Nextgen switches, Cisco’s product DNA will be transformed by the revolution in cloud computing.

With $35 billion in cash on its balance sheet, Cisco could well accelerate its pace of deal making to buy into the world’s next growth frontiers. For instance, the smart grid infrastructure market could mean $1 billion in incremental revenues for Cisco Systems where future deals are inevitable. Cisco’s deal to acquire the Chinese set top box vendor DVN demonstrates the raw potential in the parabolic growth of the Middle Kingdom’s Internet infrastructure. Starents Networks enables Cisco to be a player in the fastest growing niche of the Internet (wireless).

Cloud computing is a tech revolution and paragliding shift as significant as the transition from mainframes to client/server computing in the 1980’s, will force networks to incorporate a higher quantum of intelligence to switch, manage and provision complex virtual machines, not dumb port terminals. The virtual machine (VM), not the server, will define the cloud computing world of the future, with a profound impact on network design and architecture. Cisco’s Unified Computing System (UCS) integrates servers, switches, storage access, virtualization and management software in huge new complex cloud/Web 2.0 data centres.

I do not want to downplay the competitive threat to Cisco’s legacy networking business from both cloud computing and new competitive vendors. Juniper Networks has entered the switching business and partnered with IBM. Brocade has acquired Foundry. HP-3 Com and Huawei will all erode Cisco’s incumbent advantage in core networking Ethernet switches. Yet while the data points of networking decline are known to the financial markets, the brave new world of New Cisco (wireless, cloud computing, Web 2.0 media, video Telepresences, video over IP, green power grids) is not understood by Mr. Market. Juniper has sexier high speed router technology, Huawei’s technology is cheaper yet Cisco unquestionably boasts the strongest lead in convergence technologies between networking, computer hardware and storage and totally owns the $5 billion network security markets.

Smart grid technology will transform the global electric power grid and spawn at least a half dozen ten bagger shares in current pre-IPO Valley startups. Intelligence in networks (automatic load balancing, distributed power generation, pricing/usage hours) will be mission critical in renewable energy sources (wind, solar) and advance metering technologies are the ware of the future. Cisco’s partnership with Duke Energy and Florida Power and Light could mean a new generation of integrated service routers, mesh access points and industrial Ethernet switches. Cisco is also ramping up its services revenues, like all systems vendors, have now acknowledged (Dell/Perot Systems).

Cisco could well earn $1.50 in 2010, so we are now trading at 17 times earnings. This means CSCO is no longer a dirt cheap bargain, as it was when I recommended it in this column last April. Yet if the markets accept my thesis about New Cisco, a valuation multiple rerating is inevitable. So I would advise new money to not chase CSCO, only enter on a pullback at 22. Yet my two year target for the New Cisco is as high as 40. Santa Claus is renamed. John Chambers!

MATEIN KHALID
STRATEGIST, CAPITAL MARKETS & RESEARCH