1) Cisco faces challenges from new technologies like software-defined networking (SDN) and cloud services that could erode its hardware business more quickly. Its shares look undervalued if it can grow its cash flow, but investors are pessimistic about its growth prospects.
2) SDN allows network traffic to be best routed through a network using centralized control rather than smart switches, potentially undermining Cisco's switching business. However, SDN adoption has been limited so far.
3) To maintain relevance, Cisco is developing its own SDN capabilities and pushing its "Application-Centric Infrastructure" but must also improve its acquisition track record to develop new businesses.
1) Cisco faces challenges from new technologies like software-defined networking (SDN) and cloud services that could erode its hardware business more quickly. Its shares look undervalued if it can grow its cash flow, but investors are pessimistic about its growth prospects.
2) SDN allows network traffic to be best routed through a network using centralized control rather than smart switches, potentially undermining Cisco's switching business. However, SDN adoption has been limited so far.
3) To maintain relevance, Cisco is developing its own SDN capabilities and pushing its "Application-Centric Infrastructure" but must also improve its acquisition track record to develop new businesses.
1) Cisco faces challenges from new technologies like software-defined networking (SDN) and cloud services that could erode its hardware business more quickly. Its shares look undervalued if it can grow its cash flow, but investors are pessimistic about its growth prospects.
2) SDN allows network traffic to be best routed through a network using centralized control rather than smart switches, potentially undermining Cisco's switching business. However, SDN adoption has been limited so far.
3) To maintain relevance, Cisco is developing its own SDN capabilities and pushing its "Application-Centric Infrastructure" but must also improve its acquisition track record to develop new businesses.
Make Cisco A Value Trap? By Stephen D. Simpson, CFA on May 07, 2014 \l "A A A Filed Under: Tech n!"st#y, Technical $ System So%t&a#e, Technolo'y, ()"ity Tickers in this Article: CSC*, +,-, BM, .M/ A %#"st#atin' #eality o% tech in0estin' is that the#e1s #eally no competition 2et&een '#o&th an! 0al"e3 a2sent '#o&th, 0al"e sel!om e0e# matte#s eno"'h to mo0e a stoc4. That1s a p#o2lem %o# San 5ose, Cali%.62ase! Cisco Systems !nc" 78as!a)9CSC*:, as this lea!in' net&o#4in' company is not loo4in' at pa#tic"la#ly #o2"st '#o&th anytime soon. Ma4in' matte#s &o#se, in0esto#s &o##y that th#eats li4e so%t&a#e6!e%ine! net&o#4in' 7SD8: an! clo"! se#0ice plat%o#ms &ill e#o!e the company1s ha#!&a#e 2"siness at an e0en %aste# #ate. Cisco sha#es loo4 "n!e#0al"e! i% the company can '#o& its cash %lo& at all, 2"t in0esto#s no& seem to #e'a#! that as a 2i' ;i%.< This co"l! 2e a 2it too ne'ati0e a position, 2"t in0esto#s consi!e#in' Cisco nee! to ha0e a lot o% patience to #eali=e the 0al"e that may #emain he#e. SDN !s Coming #ut Timing Magnitude Are $nknown So%t&a#e6!e%ine! net&o#4in' th#eatens to "n!e#mine the s&itchin' 2"siness that has lon' p#o0i!e! Cisco &ith a la#'e ch"n4 o% its #e0en"e 66 a#o"n! >0? at last co"nt. ,alo Alto, Cali%.62ase! %ewlett&'ackard Co" 78@S(9+,-: an! (uniper Networks !nc" 78as!a)958,A: o% S"nny0ale, Cali%., 2a#ely o%%e# a se#io"s th#eat to Cisco in s&itchin', 2"t the s&itch to SD8 co"l! "n!e#mine a lot o% the 0al"e that Cisco has 2"ilt in this 2"siness. A!shttps9BB&&&.'oo'le.comB"#lC ctDa2'$i2?>DCAE&FGHF#IJ=mAK*i"AT414+AC8D"p#4(sMSe0#'B&2>AAAD *>'#h'oBlCFlmA6LLLLLJB@MJFyA(B)-5noTl-C*m),)'DAao(0AF,0*6 NK7KhAO*#0SSSHlN@tEHD=Ay&i20,(le5P##7CAs,&sM5Ds%@5Ny>FOhPm=&nPM4L45O* A>OJ.HsFM+tGESmFF2yaC"nt@&(eP+66./S6P>"p(JE.+pC6BQ2HBK6c&iF(isOi6 eaA6 7MQ)CMLQs0+!EJis)MGpGFoTM-tH.2t-FFFFCI0.#!4lA4.Fh-NOKe'ao(4o/ N4A.&8@!Pc>2>>)po*h0M4n#a#a%'8p@4nATAsKccT/%4ALPt0LM/lL&7=KHM-MJ>A (@QmK'Aeo17o" ?2Oai>?>DC7%a&GHF#IJ=mAK*i"AT414+AC8FAP"c(0G/ls@oBOMi.m(M-BCDt 4E4@EAG-7!mONL#LLLLLA/CLBc'BAa4C/58MheK7#=OoA&F)B8MBTKCL$"s'D AF-PC8+1Fe",K*MeCcO2EM>!%Ct-QH&t!' *ptions T#a!in' Messons &ealth!aily.comB*ptionsLT#a!in' /ith P"st these > F#ee #epo#ts yo" co"l! 2e t#a!in' 2y !ay1s en!. 10 Best Di0i!en! (TFs &&&.in0estment".comB(TFs n0esto#1s F"i!e9 The Top 10 +i'h Di0i!en! ,ayin' (TFs %o# 2014. Ma!ies n0estment Cl"2 meet"p.comBSFMa!iesn0estmentCl"2 Fin! o"t &hich stoc4 ma#4et a!0iso# #a4e! in 1>.>?A* 1H yea#s st#ai'ht So%t&a#e6!e%ine! net&o#4in' %eat"#es a cent#ali=e! cont#olle# &ith a complete 0ie& o% an enti#e net&o#4 an! 4no&le!'e o% all paths an! capa2ilities, allo&in' it to 2est #o"te t#a%%ic th#o"'h the net&o#4 as con!itions chan'e. This allo&s a net&o#4 ope#ato# to "se cheape#, less sophisticate! ;&hite 2oN< s&itches as the cent#ali=e! cont#ol plane ta4es a&ay the nee! %o# sma#t s&itches that #eco'ni=e an! mana'e !i%%e#ent types o% pac4ets. The th#eat, then, is that the SD8 o%%e#in's o% companies li4e ,alo Alto62ase! VMware !nc" 78as!a)9.M/: an! Microso)t Corp" 78as!a)9MSFT: o% Ae!mon!, /ash., &ill se#io"sly "n!e#mine the 0al"e o% Cisco1s s&itches. So %a# the implementations o% SD8 ha0e 2een limite! an! it1s not al&ays as easy as a!0e#tise! to s&ap o"t a net&o#4 o% sma#t s&itches %o# mo#e commo!iti=e! s&itches. *0e# time, tho"'h, the#e is a #eal #is4 that SD8 cont#olle# o%%e#in's %#om .M&a#e an! othe#s &ill sh#in4 the ma#4et %o# Cisco1s hi'h60al"e s&itches. Cisco isn1t stan!in' a#o"n! &aitin' %o# this to happen. The company is !e0elopin' its o&n SD8 capa2ilities an! is also p"shin' its ;Application6Cent#ic n%#ast#"ct"#e< that "ns"#p#isin'ly maintains a #ole %o# Cisco ha#!&a#e. Can Cisco 'ut !ts Cash To Good $se? Inli4e A#mon4, 8.@.62ase! !nternational #usiness Machines Corp" 78@S(9BM: an! Santa Cla#a, Cali%.62ase! *racle Corp" 78as!a)9*ACM:, Cisco !oesn1t ha0e a pa#tic"la#ly 'oo! histo#y o% 0al"e6a!!e! M$A. The company1s eNpensi0e %o#ays into 0i!eo ha0en1t #eally a!!e! 0al"e an! it1s "nclea# that its So"#ce%i#e ac)"isition &ill maintain the company1s lea!e#ship in the %ace o% ent#enche! competito#s o# ne& playe#s in the sec"#ity space. Mi4e&ise, the company hasn1t al&ays !one a 'oo! Po2 o% i!enti%yin' oncomin' th#eats, s"ch as Seattle62ase! +, Networks !nc" 78as!a)9FF.: in application !eli0e#y cont#olle#s 7ADCs: an! hea!in' them o%% th#o"'h ac)"isition o# competiti0e #esponse. As tech companies mat"#e, s4ill%"l M$A 2ecomes mo#e an! mo#e impo#tant. Ae%e##in' 2ac4 to BM an! *#acle, a la#'e pe#centa'e o% the most competiti0e 2"sinesses the#e &e#e ac)"isitions. De0elopin' m"ltiple s"ccess%"l 2"siness is 2eyon! the capa2ilities o% most companies an! Cisco nee!s to 2e 2ette# a2o"t i!enti%yin' 4ey ac)"isition ta#'ets to maintain its #ele0ance in the chan'in' T ha#!&a#e an! so%t&a#e ma#4ets. To 2e %ai#, this is not a Cisco6eNcl"si0e p#o2lem, as neithe# 5"nipe# no# +e&lett6,ac4a#! ha0e #eally !istin'"ishe! themsel0es &ith 'oo! M$A. t1s also impo#tant %o# companies to #eco'ni=e &hen it1s time to eNit a 2"siness. BM is pe#haps the 2est eNample o% this, as the company has 2een &illin' to sell o%% maPo# 2"sinesses 7pe#sonal comp"te#s an! NJO se#0e#s, %o# instance: once it 2ecame clea# that the '#o&th o% the ma#4et an! the company1s position &e#e no lon'e# 'oo! eno"'h to ea#n accepta2le #et"#ns. Not -nough Growth !n A Growth&%ungry Market By most #easona2le meas"#es, Cisco is not an eNpensi0e stoc4. The company1s ma#'ins an! #et"#n on capital a#'"e %o# 2ette# m"ltiples to sales, (BTDA an! 2oo4 0al"e than the ma#4et c"##ently 'i0es the stoc4. In%o#t"nately, that1s P"st not ho& tech typically &o#4s3 #e0en"e '#o&th has a !isp#opo#tionate in%l"ence o0e# tech stoc4 m"ltiples an! c"##ent estimates a#e callin' %o# P"st a 1? #e0en"e CAFA 2et&een %iscal 201> an! %iscal 201O. Foin' %o#&a#!, eNpect Cisco to see some ne'ati0e impact %#om SD8 an! a shi%t to&a#! clo"! in%#ast#"ct"#e se#0ices 2"t it sho"l! still still post lo& sin'le6!i'it '#o&th. F #ee cash %lo& 7FCF: '#o&th sho"l! 2e ne'li'i2le, tho"'h, as Cisco sho"l! see ma#'inBFCF !e6 le0e#a'e. (0en &ith minimal '#o&th, tho"'h, a !isco"nte! cash %lo& mo!el s"''ests a %ai# 0al"e in the hi'h R20s. The #ottom .ine t1s 'oin' to ta4e time %o# Cisco sha#es to !eli0e# on the potential s"''este! 2y a !isco"nte! cash %lo& mo!el. The#e1s a #is4 that the company1s #e0en"e an! FCF come in e0en lo&e#. Ai'ht no& the#e1s a '#eat !eal o% pessimism #e'a#!in' Cisco1s a2ility to compete an! '#o&. That pessimism co"l! pass 2"t it1ll ta4e some time, ma4in' CSC* a to"'h stoc4 to #ecommen!. The 0al"e seems to 2e the#e, 2"t the St#eet1s %ea#s &ill ha0e to p"t to #est %i#st. Disclosure: as of the time of writing, the author owned shares of EMC, the majority owner of Mware!