The past few years have been a wild ride for tech giant Cisco (CSCO) and CSCO stock holders. That’s because the Great Recession, a paradigm shift in networking technology and tough competition have all forced CSCO to rework its business model.
But CSCO Chairman John Chambers has proved himself equal to that triple threat, slashing costs and payrolls, dumping ancillary products like a consumer video camera and reinventing the company.
The result: Sales soared, margins widened, and between July 2012 and July 2013, Cisco stock soared by 45%.
Then came late December’s NSA spying scandal alleging the agency used back doors in CSCO network switches and devices from other U.S. tech vendors to surreptitiously collect data. The news hammered the company’s sales in its top five emerging markets — Russia, Brazil, India, Mexico and China — where orders fell by 10% in the most recent quarter.
Not surprisingly, Cisco stock slipped more than 15% between mid-November and mid-December.
At a time when networking technologies are experiencing radical change and powerful competitors are gaining ground in Cisco’s core business, is now the time to bet on CSCO stock? To help you decide, we’ll examine three pros and three cons:
Pros of Cisco Stock
CEO John Chambers Is a Rock Star: John Chambers is a rare, long-lasting bird in the tech industry. He has been CEO of Cisco since 1995. He has led his company through the dotcom boom and bust, the Great Recession, radical downsizing and massive advances in technology. Chambers has faced myriad challenges before and has a solid track record of rebooting the networking giant’s business strategy to gain a market and technology edge.
Refocusing Products: Cisco’s roots are in high-end hardware, but the company is suiting up to compete in the application arena. The company has embraced the so-called “Internet of Things,” which encompasses “smart cities” and machine-to-machine communications. Cisco also is staking a claim in software defined networking (SDN), cloud and emerging growth sectors like security and collaboration while holding the line on costs.
Attractive Valuation and Dividend Yield: Cisco is a big, cash-deploying company. CSCO stock pays out dividend yielding 3.4% at current prices, which ranks among the best in the tech industry. Meanwhile, Cisco is trading just under its five-year price-to-earnings ratio of 16 (at 15.2) and less than half the industry’s average of 35.2. Cisco stock is a little more volatile than the rest of the market, but it’s nothing I’d balk at.
Cons of Cisco Stock
Declining Core Product Revenue, Earnings: Cisco continues to struggle from weakness in service provider sales — once the mainstay of its business — and faces an onslaught from networking gear providers like Juniper Networks (JNPR), Alcatel-Lucent (ALU) and China’s Huawei. As switches and routers have become increasingly commoditized, Cisco is feeling the heat: Earnings in the most recent quarter dropped a whopping 55% compared to the same quarter a year ago; sales slipped by 8%.
Shifting From Switches to Services Is No Easy Task: Software and services will continue to gain importance for CSCO – its Insieme Networks is pairing the high-end Nexus 9000 switch with an Application Policy Infrastructure Controller (APIC) to accommodate more robust data center requirements. Still, Cisco’s custom solution is more costly than rivals’ more basic product offerings, and the company appears willing to sacrifice market share for margins. The jury is still out on whether that will be a viable strategy over the longer term.
Behind the Curve on Cloud? Last month, when CSCO announced plans to spend $1 billion over two years to build a global network of clouds with a group of partners, initial response to the idea was subdued. After all, just a year earlier, CSCO had rejected that approach. Many tech observers saw the so-called “intercloud” as Cisco’s response to rivals like Hewlett-Packard (HPQ), IBM (IBM) and VMware (VMW) who already have rolled out cloud strategies. The bigger challenge for CSCO, however, is that the intercloud offering will leave CSCO duking it out with Amazon.com (AMZN) for dominance in a highly commoditized cloud services market.
CSCO faces some tough challenges transitioning its hardware-centric business into a software-defined world, but John Chambers has done it before, and I believe he can do it again. On the networking gear front, however, expect the company to continue to struggle – particularly in emerging markets.
I also believe CSCO will need to boost the value proposition of its intercloud offering to avoid a cloud services price war with AMZN.
So, should you buy Cisco stock? Despite these and other market headwinds, CSCO is solid, and the company has made increasing shareholder value a priority — and that includes dividends. I think CSCO is a buy now.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.