A Spooky Moment for Cisco

Managing Editor’s Note: A big thank you to everyone who attended Jeff’s briefing this afternoon!

As he said during the event, the next several months are going to see plenty of ups and downs. That’s why he hosted this event… to make sure you’re prepared when the next shock hits the market, and so you can use these wild swings to your advantage and profit on the downturns.

And good news if you missed it… Jeff’s hosting a special encore tonight for those who couldn’t attend earlier today.

Just click here to catch it when it airs tonight at 8 p.m. ET.

Yesterday was an exciting day for networking giant Cisco (CSCO).

The company opened the doors on a stealth project that it has been working on for years:  quantum networking. I’m surprised it hadn’t done so sooner.

To some, Cisco’s foray into quantum computing might not seem natural. After all, Cisco isn’t a quantum computing company. It’s best known for its internet routers, switches, and cybersecurity hardware and software.

Cisco is a rare anomaly in the tech world amongst companies that survived the dot-com bubble and boom. Most have long since exceeded their dot-com highs in their share price… but not Cisco – it’s still down about 23% after 25 years.

Those who bought in the bubble and are still hanging on are still down after all that time.

Cisco Stock Chart Since 1990｜Source: Bloomberg

It’s an incredible story for such an innovative and successful company. And it’s an interesting study in valuation metrics and how they changed to result in the above stock chart.

Cisco’s Spark of Innovation

In 1999, Cisco’s sales grew 43.9 percent year over year. And in 2000, sales grew by another 55.5 percent over 1999.

The expectation of continued large, double-digit growth grew Cisco’s valuation to 23.4 times annual sales. That was very rich back then, but not uncommon to see today for very high-growth companies in a hot sector. It’s a valuation multiple that assumes that kind of growth will continue.

Unfortunately for Cisco, it didn’t. Cisco grew sales by only 17.8 percent in 2001, and sales fell by 15.2% in 2002. This pulled Cisco’s enterprise valuation (EV) down from $442 billion to just $73 billion by 2002, at an EV/Sales of 3.9.

In 2002, Cisco’s sales were the same as they were in 2000, but the company was worth 83% less, because the market no longer believed Cisco could maintain a high growth rate. And since 2004, Cisco has traded at an EV/Sales ratio usually between 2 and 4.5 to this day.

Despite being the leader in its industry, Cisco’s problem has always been low, single-digit sales growth, sometimes annual declines, and slow growth in increasing its free cash flow. The information technology (IT) market is so competitive and hypersensitive to pricing that, despite selling cutting-edge technology, it often feels like a commodity sale – just pushing IT boxes out the door.

Which is why it’s exciting to see Cisco doing something completely different and innovative – quantum networking.

A Network of Quantum Processing Units

It has been natural for the quantum computing industry to be focused on building and optimizing single and centralized, monolithic quantum computers.

After all, these next-generation computational systems have to be invented first before the technology can proliferate throughout data centers and work in concert.

But as Bleeding Edge readers know well, a lot of progress is being made on that front. And the National Institute of Standards and Technology (NIST) has made progress by already selecting the four key algorithms to be standardized for future use in a post-quantum computing world.

And when the time for proliferation comes, the entire global internet infrastructure will need to be rebuilt and “strung” together. And it will be a bonanza for companies like Cisco.

Knowing that, it’s easy to understand why Cisco has been building quantum networking technology for years now. And given the current standardization efforts by NIST, it makes sense to become public and support those standards in early test environments.

Cisco’s Quantum Research Lab | Source: Cisco

Cisco’s quantum research lab has been focused on how to network multiple quantum processing units, or quantum computers, together in data centers.

The idea is to have a distributed architecture of quantum computing resources connected by Cisco quantum networking equipment.

A Spooky Semiconductor

Cisco is largely a global communications technology company. I’d guess that about 40-50% of the world’s internet traffic flows through Cisco routers. Without its communications equipment, the global internet would fall over.

So Cisco is developing new technology and new architecture to position itself to do the same in a post-quantum computing world.

In partnership with the University of California Santa Barbara, Cisco developed a quantum network entanglement chip (a semiconductor) that generates pairs of entangled photons “that enable instantaneous connection regardless of distance through quantum teleportation.”

This phenomenon is what Einstein, not-so-scientifically, called “spooky action at a distance.”  He was referring to how a pair of entangled particles could instantaneously reflect a change in superposition regardless of their distance from one another.

This phenomenon is called “Quantum teleportation,” despite the fact that nothing is actually teleported other than the state of a particle or a photon.

What makes Cisco’s quantum research relevant to the real world is that:

• It is developing quantum networking technology that will operate at standard telecommunications wavelengths over fiber optic cables (i.e., it uses existing infrastructure).
• Cisco’s tech functions at room temperatures, so it can easily scale in data centers. The quantum technology uses a photonic integrated chip (PIC), almost certainly a derivative of Cisco’s acquisition of Acacia Communications, a past favorite company of mine that I predicted would be acquired. Cisco picked up Acacia in early 2021.
• Cisco’s quantum network entanglement chip will be capable of producing 1 million high-fidelity entangled pairs of photons per output channel, with up to 200 million entangled pairs per second in each chip.

Cisco is clearly designing for scale and commercialization.

But before we get too excited, we should keep in mind that Cisco is still in research and development mode. And by its own admission, it believes that its new quantum technology has the potential to result in quantum networking applications within 5-10 years.

That feels way too far away to me.

A Supercharger to Artificial Intelligence

Given the pace at which quantum computing companies are moving right now, and what’s happening in artificial intelligence, it’s hard to believe that breakthroughs won’t come faster than that. In fact, I don’t believe it for a second.

The more likely outcome is that a smaller, public or private company – that is developing quantum networking technology – completely disrupts Cisco, Juniper, Huawei, and Nokia.

For example, there is a small, early-stage company called Aliro that is working on this specific problem. It is still private, and ironically, Cisco’s corporate venture capital arm invested in Aliro last year.

This quantum future is not as far out as the “experts” think. The biggest challenges will be solved within the next couple of years, opening the way for widespread commercialization.

Quantum computing will be like a supercharger to artificial intelligence – a super accelerator to the most challenging problems that humans have yet to solve.

Jeff