Cisco Systems, Inc. (CSCO) Layoffs Boost the Bull Case

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Terrible news for employees of Cisco Systems, Inc. (NASDAQ:CSCO) is good news for anyone holding CSCO stock.

Cisco Systems, Inc.: Layoffs Boost the Bull Case on CSCOThe company is set to lay off 14,000 employees, or 20% of its global workforce, as it transforms its focus to cloud-based services and away from traditional hardware. It has been a long and painful process for everyone involved and now the rank-and-file are paying the steepest price.

From CSCO’s perspective, it simply doesn’t need a workforce of 70,000 to go forward as a company essentially predicated on software. Moreover, the company needs workers with different skill sets than the one it has now.

Analysts point out that the shift to cloud computing obviates the need for as many workers in the back end of information technology operations.

CSCO’s Future Lies in Software

It’s depressing, no doubt, but it sure helps the bull case on Cisco stock. The market generally applauds layoffs because cost cuts translate into higher margins and profits.

In the case of CSCO specifically, it will also free up cash for acquisitions. From a note by RBC Capital:

“Given that the Company has been acquisitive over the past six months and Cisco is shifting its focus to software/security/services we think a [reduction in force] would be beneficial to long-term operating margins. While a 20% reduction (~14,000 employees) would be severe, we think a number closer to ~10,000 would be fair or in the range of 10-15% (73,104 employees as of latest 10-Q). Finally, we think a [reduction in force] would act as yet another signal that the Company is focused on changing its current business model. Net Net: we think a reduction in force would be beneficial given the number of acquisitions the Company has made and believe the topic will now be addressed during tomorrow’s conference.”

CSCO stock failed to get a lift from the news, but that could be because the market is anxious ahead of earnings, which come out after the bell. Shares in Cisco have been cooling off since Monday when they hit levels not seen since 2007.

As painful as it may be, if you’re bullish on CSCO’s long-term, software-in-focus strategy, this “reduction in force” makes good sense.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/cisco-stock-csco-bull-case/.

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