by Tom Taulli | November 27, 2013 9:17 am
While Cisco (CSCO) is not the worst performer for the Dow in 2013, it has lagged big time.
CSCO stock is only up 8% YTD while the S&P return is a robust 26%. But perhaps this is an opportunity to pick-up a nice value by buying Cisco shares cheap?
Perhaps, but CSCO stock investors will need a lot of patience for that to pay off. Some of its issues could prove difficult to overcome.
The good news is CSCO stock should benefit from some megatrends. One is the continued growth of cloud computing, which allows businesses to access applications from datacenters.
Then, of course, there is the surge in mobile where Cisco has a great footprint.
And yes, CSCO is the world’s dominant player in providing the core networking infrastructure – such as routers and switches — to power these categories. Once customers install this technology, they tend to remain sticky since it’s usually too expensive and time-consuming to seek replacements.
Because of this, there has been a nice recurring revenue stream, which should be great for CSCO stock, right?
Well, because of the company’s scale, it has been hampered by the slow IT environment. The problems have been especially notable in emerging markets. In the last two quarter, the order growth plunged from +13% to -12%. This has not only been a problem for CSCO stock but also other large tech operators like Oracle (ORCL) and IBM (IBM).
Because of the fall-off in business, CSCO projects revenue will decline 8% to 10% in the current quarter and that earnings will come to only 46 cents a share.
The Street, on the other hand, was looking for 52 cents a share and growth of 4% to 6%.
Given this, it was no surprise that investors dumped CSCO stock (it tumbled by 11% on the day the news came out).
It’s far from clear why there has been a sudden drop off. But one theory is that governments in emerging markets are worried about the NSA revelations. Then there is the other possibility that China is taking steps to protect its own home-grown networking operators, like Huawei or ZTE.
But whatever the reasons, the fact remains that investors are reasonable to be concerned about the prospects of CSCO stock.
Yet there are other things for investors to worry about CSCO stock. Keep in mind that the company has fumbled in its forays into other categories, such as set-top boxes and videoconferencing.
If anything, these moves may have added to the distraction of management. And this has provided opening for competitors like Alcatel Lucent (ALU), Huawei, Juniper (JNPR), Hewlett-Packard (HPQ) and Ericsson (ERIC). There has also been pressure from dot-com players, such as Facebook (FB), Google (GOOG) and even Amazon.com (AMZN), which have been building their own networking systems.
It’s true that CSCO stock could get a boost from its Nexus 9000, which is a next-generation switching system. It is based on something called software-defined networking, which allows for more configuration. This is certainly critical in today’s dynamic environment. However, it will take time for CSCO to get customers to adopt the product.
In other words, this may be leading to customer delays on purchases.
No doubt, CSCO stock appears to be a value play right now, with the forward price-to-earnings ratio of 10X. The dividend yield is also at an attractive yield of 3.2%.
Although, the fact remains that a value stock can tread water for a long time.
And as for CSCO stock, the headwinds appear to be more than just short-term issues, as seen with the competitive pressures, slowing IT spending and problems in emerging markets. In other words, there is really no need to rush in now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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