Cisco Systems, Inc. (NASDAQ:CSCO) was hit with a recent setback that’s reminiscent of its choppy ride in the second half of the year. On Wednesday, federal court jurors in San Jose, California handed a victory to fierce CSCO rival Arista Networks Inc (NYSE:ANET). According to a Reuters report, CSCO was seeking $335 million in damages due to “copyright infringement of its user interfaces.”
However, jurors were not convinced that Cisco’s unique user interface technologies were developed solely as a result of the company’s creativity. Instead, Arista’s attorneys successfully defended against CSCO by deploying the “scenes a faire” argument.
This states that, in certain circumstances, an idea cannot be expressed unless it incorporates specific elements. These elements then no longer have the traditional copyright protection of exclusivity. Not surprisingly, Cisco stock absorbed a small loss of value following the verdict.
More so than the actual impact of the lawsuit is its implications. As noted by InvestorPlace writer Tom Taulli, the biggest challenge facing Cisco stock is competition. In the company’s primary networking business, the company faces industry giants such as Juniper Networks, Inc. (NYSE:JNPR) and Hewlett Packard Enterprise Co (NYSE:HPE). Worse yet, the pool of potential CSCO customers is shrinking as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) are developing their own networking solutions.
As to be expected, the big boys have taken their toll fundamentally on Cisco stock. The technology company took a sizable blow in its hardware and router business for the most recent quarter. Switching to other sectors hasn’t always resulted in consistent success, either. Even there, industries such as network security are dominated by firms like Palo Alto Networks Inc (NYSE:PANW) and Fortinet Inc (NASDAQ:FTNT). No matter which way it goes, CSCO stock will face a tough road.
Cisco Stock Has the Right Stuff
That said, no company is guaranteed an easy path. Even if a business is flourishing today, competition is only right around the corner. Since digital networking isn’t exactly a proprietary function, the next best thing for an investor is to find a financially sturdy player. There’s going to be a lot of tumbles, as the recent verdict demonstrates, but Cisco stock is one of those names that’s built like a linebacker.
This simply means that CSCO stock can take it just as much as it can dish it. There’s a lot to like in the balance sheet — rising cash levels, controlled inventory, and investments in physical infrastructure. That tells me that management is serious about strategy and vision, providing confidence for long-term holders of Cisco stock. Also, CSCO has excellent free cash flow, so the administration aspect of the business is about as close to worry-free as you can get.
I’m especially impressed by Cisco’s financial discipline. Profitability margins continue to lead the industry, and are well in line with historical averages. Too many times in the broader tech sector we see organizations that are doing relatively well today, but poorly against prior results. This is not so with Cisco stock. Because of this discipline, shares are also undervalued against trailing earnings.