Lesson Learned: Cisco’s (CSCO) Fiasco

It was hyped as something that would “forever change the Internet and its impact on consumers, businesses and government.” Now that it’s here though, the non-response from Cisco’s shares reflects an unimpressed - perhaps disappointed - investor base.

On Tuesday, Cisco Systems Inc. (NASDAQ:CSCO) finally unveiled its much-ballyhooed piece of internet equipment. As it turns out, this game-changer is an internet router…. not the kind of router one might find attached to home computer, or even at a business. This router is designed for telecom and telecable providers to help them manage an ever-growing degree of web traffic, as file sizes get bigger and bigger.

And, it is a powerful piece of equipment. The new CRS-3 router is three times as fast as its predecessor, and can theoretically deliver digital copies of every movie ever made in four minutes.

So why didn’t the stock continue to surge on what was starting to become a site-unseen breakthrough? Because not only is it not a breakthrough, it’s not even poised to be a significant boost to Cisco’s top or bottom line.

Been there, done that, and so what?: Congrats to Cisco… too bad a partnership between Verizon (NYSW:VZ), competing router manufacturer Juniper Networks (NASDAQ:JNPR), NEC Corporation, and Finisar (NASDAQ:FNSR) already achieved that data-transmission speed. How or why Cisco considered their hardware to be ground-breaking is unclear. What is clear, however, is that it wasn’t ground-breaking.

That wasn’t the only source of disappointment though. The potential fiscal impact the CRS-3 could create for Cisco is pretty weak as well.

The router’s price tag is $90,000 each, which isn’t chump change. But, given that it took the company several years to sell 5000 of the CRS-1(the predecessor) router, how many CRS-3’s will the world need…. even with exponential growth in web traffic? If Cisco can sell 1000 of them per year, it’s still only an annual opportunity of about $90 million in sales. For comparison, the company is expected to pull in revenue of just under $40 billion this year.

Lesson learned: It may be tough to decide who should learn the biggest lesson here….. Cisco, or investors.

Cisco - and any other company mulling a similarly-pumped product launch - should recognize a new product that doesn’t live up to the hype may well end up doing harm to investor confidence.

On the flipside, investors may want to take this as a reminder that hyperbole can easily get out of hand, and carry a stock to excessive and unsustainable prices (which it did here). Said another way, the Cisco/router story is yet-another affirmation that the old Wall Street adage “Buy the rumor, sell the news” can actually be good advice.