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Why Cisco Might be a Bad Decision for your Portfolio!

May 10, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

1 followers

Since the last few quarters the management of networking equipment behemoth Cisco (CSCO) has been talking about a business concept called “Internet of Everything”. However, it has failed to provide clarity on the business opportunities presented by this all pervasive concept (as has been advocated by the top brass). Additionally, the competitive pressure exerted by evolution of Software Defined Networking (SDN) has bred scepticism among investors as to the future growth prospects of the company.

Under-performance over the last quarters

Cisco being a colossal enterprise it is, has failed to deliver strong performance for its shareholders on the exchange as the share price range has remained stagnant at $20-$25 level. Over the past few quarters, the quarterly results have been quite disappointing because of declining revenue and operating margins in its switching and routing segments. These segments form the core of Cisco’s business and as such, the stagnancy in these segments is an indicator of poor performance. The next quarterly results are poised to be announced on 14th of May, 2014.

Low expectations because of weak performance

Analysts expect Cisco to post revenue of $11.36 billion for the third quarter. This would be a decline of 7% from the year-ago period. In addition, Cisco's earnings are expected to decline from $0.51 per share in the year-ago quarter to $0.48 per share in the third quarter implying a fall of around 6%.

Hence, a weak performance is expected from Cisco, and it isn’t surprising given the wide-ranging difficulties that the company is facing in its business. The revenue estimate for full year 2015 has come down by a whopping $5 billion since November. The company is facing visible heat from analysts on the Street because of a grim future and unambiguity around Cisco’s venture in the “Internet of Everything”. While the said segment still remains untested, the unfavourable thing about the company is the fact that even growth in its core business of routing and switching is sagging.

A big loss

Coming back to the “Internet of Everything” (IoT) at Cisco, a shocking news that popped up recently has sounded a warning bell for investors. CEO John Chambers, a committed supporter of this concept is going to lose a prominent member of his team. Guido Jouret, who was the vice president and general manager of Cisco’s Internet of Things business unit, has resigned “to pursue a new opportunity,” according to a statement issued by the company. Estimating the financial impact of the IoT is tricky, since adding communications capability to various objects–like doorknobs or light bulbs–may not mean that manufacturers can charge more for them. But Cisco has estimated a figure of $14.4 trillion, a combination of increased revenues and lower costs that will be created or migrate among companies and industries from 2013 to 2022.

Though the number appears to be massive for the time being, it comes with numerous strings attached. Hence, it is not prudent to bank upon a number about which there is minimal clarity because the company might take considerable time to sail through before it hits the shore.

New vision is required

Unarguably, the performance of any company depends a great deal upon the vision and actions of the CEO and whether it be taking advantage of lucrative opportunities or refraining from investing in non-feasible ideas, a CEO is highly responsible. One of the biggest examples to support this theory is Mr Steve Ballmer, who we saw stepped down as the Microsoft (MSFT) CEO a few weeks back. On the day of the announcement, Microsoft shares rallied by nearly 7.3%. Excluding dividends, Microsoft shares are up more than 20% since the day before the announcement. Obviously, investors have more confidence in Microsoft now, with shares recently breaking $40 after a long time.

A similar situation has arose with respect to CEO John Chambers as the investors are now demanding his removal. Cisco’s performance in this fiscal has been a flop and as a result the advocates of Chambers’ removal have cited a massive lack of vision. If the upcoming results fail to impress the investors then in all probability, we might see a strong movement from activist investors demanding a change in top management.

Competitive pressure

As I mentioned, the competition for Cisco remains strong especially in the areas that might offer credible growth to the company. In SDN, there is an onslaught of competition from VMware regarding the battle for next-gen DC architectures. As per a recent news report, EMC and VMware (VMW) are using Arista Networks, a Santa Clara, California-based switch vendor and rival to Cisco, for key parts of their cloud and converged infrastructure portfolio. They are using switches from Arista in Project Mystic, the code name for an EMC-branded converged infrastructure appliance that's currently in development.

The other area that Cisco has been trying to establish a foothold in is cloud solutions. Again, this space is too crowded with the presence of giant players like HP (HPQ) and Amazon (AMZN). Hewlett-Packard has launched its Helion line of OpenStack offerings, including its own OpenStack distribution and Cloud Foundry-based Platform-as-a-Service (PAAS), which can prove to be a big threat to Cisco.

Final words

Undoubtedly, Cisco has not been able to deliver the kind of growth that could be expected of a tech company. Besides missing out on credible opportunities, the company has also failed to keep up growth in its core business. As such, it is best to stay away from making a position in this fading giant.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

Rating: 0.0/5 (0 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 7 months ago

You never said what you think CSCO is worth, nor its price at the time of your article.

Would you please fill readers in on those two key items?

batbeer2
Batbeer2 premium member - 7 months ago

>> Would you please fill readers in on those two key items?

What makes you think you know what readers want?

If you need help underatnding what CSCO is worth or knowing the stock price on May 10th, then say so. Maybe the author or someone else will be inclined to fill you in.

In any case, do not address this author or anyone else on my behalf.

Please leave your comment:


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