It has been a long time since Cisco Systems, Inc. (NASDAQ:CSCO) stock was exciting. Will an expanded deal with an even more boring telecom equipment provider make Cisco stock interesting again? You can probably guess my answer, but we’ll get back to that.
The telecom equipment company CSCO is expanding its business with is Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC), with whom it forged an initial deal in 2015.
The two sides hope to target new corporate and public clients next year in an effort to broaden their customer base beyond telecom operators, and into the Internet of Things, smart cities and other industrial purposes.
Based in Sweden, Ericsson is the second largest mobile networking equipment vendor in the world, but it’s extremely telecom-focused. It’s hoping to change that, with a goal of having a quarter of its revenues come from non-telecom customers by 2020.
Cisco, meanwhile, thinks the expanded Ericsson deal will trigger better growth in the near-term, projecting it could add $1 billion in sales as early as 2018. That would amount to a less than 2% increase over this year’s projected sales — not a pittance, since CSCO’s sales have improved more than that only once since 2013. But 2% sales growth is not exactly something that energizes investors to start gobbling up Cisco stock.
No Buzz for CSCO Stock
The truth is, CSCO stock has been stale for a long time on Wall Street. Sure, Cisco stock was up 12% in 2016, ahead of the Nasdaq Composite (8.2%) and S&P 500 (10.2%) but lagging for a Dow Jones Industrial Average stock (13.8%). Going back further, CSCO stock has trailed both the Nasdaq and S&P, and it is roughly in line with the Dow over the past five years. That’s what happens when your sales fall from annual double-digit growth to almost nil.
Although it has diversified, and the company is trying to do so even more with this Ericsson deal, Cisco is still predominately a hardware manufacturer (routers, switches, etc.) in a world that is quickly migrating to cloud software. Companies that cater to cloud-based services, like Arista Networks Inc (NYSE:ANET) (up more than 25% last year), are where all the growth is happening in the semiconductor industry these days.
And when you’re out of fashion, Wall Street can smell it. True, Cisco stock’s 3.4% yield is better than most tech stocks, and for the year it gives it a solid 15.4% total return. Plus, CSCO stock is pretty cheap especially for a tech company, trading at just 12.2 times forward earnings estimates. If you’re an income or value investor, Cisco stock has some appeal. But if you want growth and excitement, CSCO stock is no longer the place to find it — not like it was before the tech bubble burst at the turn of the century or even when it nearly doubled just before the 2008 to 2009 recession.
Avoid Cisco Stock, Try the Cloud
In a way, CSCO stock has never fully recovered from the recession; it’s still trading lower than it was a decade ago. No beefed-up partnership with a telecom equipment maker is going to change that. To truly grab investors’ attention again, CSCO is going to need a much more radical facelift.
Until then, there are better places to invest your money if you’re looking for growth. Arista Networks might be a good place to start.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
