I recently compounded my biggest investment mistake of 2019 by buying more stock in Cisco Systems (NASDAQ:CSCO).
This has not been a good year for the maker of networking gear. The shares are little changed from where they were a year ago. Over the last six months they have plunged from the high-$50 range to their Dec. 17 opening price of $46.22 per share.
There are analysts warning of dark days ahead. Proceed with caution, says one. Is CSCO the next International Business Machines (NYSE:IBM), asks another? It’s a legacy tech company being left behind, suggests a third.
Why, Cisco has even lost its leadership position in Gartner’s (NYSE:IT) “Magic Quadrant” to privately held Aruba Networks.
What Cisco Is Doing
The story CEO Chuck Robbins had been spinning, between fawning interviews about his upbringing in the Atlanta exurbs, is that Cisco wants the regular income of software subscriptions over the choppy results of hardware wins.
But that’s not entirely true. Behind the scenes, Cisco has been refreshing its main product line for the Internet of Things, a world where wireless connectivity is ubiquitous, and where anything that can collect data uses it.
At the center of it is a chip dubbed Cisco Silicon 1, developed by Leaba Semiconductor, an Israeli company Cisco acquired in 2016.
The chip is at the heart of a “pluggable” optical router that can move 10.8 terabytes of data per second. That’s 10,800 gigabytes, the equivalent of 25,000 feature films. This will connect to a new standard dubbed OpenRoaming, which can log devices to Wi-Fi 6 services automatically. The company has also been remaking its monitoring software.
Cisco is also buying Exablaze, whose low-latency routers are built with field programmable gate arrays, hardware pre-loaded with software. Exablaze has been winning traction in stock trading and other financial niches. It’s Cisco’s sixth acquisition this year.
Better Days Ahead
Bears have been comparing Cisco with companies that missed the cloud like IBM, Oracle (NYSE:ORCL), and with Intel (NASDAQ:INTC), which missed the mobile revolution. But as its recent product announcements show, Cisco has not been left behind in the networking arena.
The machine networking revolution has only been delayed over concerns about data privacy and whether computers can be trusted. There has been little incentive for companies to move away from the cloud-and-device paradigm, which continues to deliver growth and profits.
The result, assuming that Cisco isn’t blowing smoke, is that it looks like the rarest of birds in technology — a bargain. The trailing price-to-earnings ratio is 18.4 and the yield on the 35 cent per-share dividend is 3%. Cisco earned $2.63 per share over the last year, so that dividend looks sustainable.
Under Robbins, who became CEO in 2015, succeeding industry legend John Chambers, Cisco has been managed for income rather than big capital gains. The dividend has nearly doubled. Until this year, the stock was averaging a 15% gain per year, in line with other S&P 500 stocks.
The Bottom Line on Cisco Stock
Cisco stock is not for everyone.
It’s not a “high beta” name. It won’t outperform the market during boom times. It’s a conservative investment for those who want to protect what they have and earn a modest income.
My personal portfolio still has some risky assets in it, as I’m still not feeling my age (I turn 65 next month). But I need downside protection. I’m too old to start over.
Cisco is part of that downside protection. I think it’s ready for the next technology revolution, and meanwhile it should continue to perform. There are a lot of stocks I’ll sell ahead of it.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CSCO.
