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The Internet of Everything Will End Cisco's Woes

April 27, 2014 | About:

Cisco has been underperforming on the index for a while now and the earnings for FQ2 have only added to the decline. Though the results for the quarter beat Street estimates on revenue and EPS, it failed to appease investors because of bleak business prospect for the future and lack of direction on new initiatives.

The results were not disappointing

As I mentioned, the revenue and EPS numbers announced by the company as well as the guidance for FQ3 are in alignment with their previous stance but the big highlight that put-off investors and sparked a selling session on the exchange was with respect to order numbers. For the second quarter, orders declined 4% on a y-o-y basis, similar to first quarter. A major chunk of Cisco's revenue comes from switching equipment where the orders declined 6% and for routers, the decline stood at 5%. This stagnancy in Cisco's business has been visible for a while and it has given birth to a farrago of questions concerning company's growth prospects.

Yes, the stock price has hit stagnancy

Cisco's stock price has stayed in the range of $19-$23 for a major part of last year and this has not been received well by the investors. However, the company has exhibited a strong sense of generating value for its shareholders via its dividend and buyback policies. An increase of 12% in dividend to 19 cents per share for the quarter testifies management's positive outlook on the cash position of the company. Cisco has done a commendable job in compensating for the slow growth in its share price via a dividend yield of 3.5% even when the company is struggling with a mature product line and global slowdown.

Cisco provided a guidance on EPS within the range of $0.47-$0.49 for the next quarter which concurs with the consensus estimate of $0.46 per share. It is in fact unjustified to blame the company for delivering not-so-good results because the management went a bit subdued into the quarter and the actual performance has met expectations. Even though the road ahead is difficult, the guidance is in conformity with the expectation of analysts

Up Next: Internet of Everything

During the earnings call, CEO John Chambers mentioned the term "Internet of Everything" umpteen number of times stating that it has moved on from being a concept to a business imperative. While there is still ambiguity regarding the implications of IOT, it is highly evident that the management is largely banking on it to provide growth opportunities. Cisco is investing heavily on creating architectures with services and partners in order to provide solutions to its clients and be in centre of "Internet of Everything".

An opportunity of $2 billion in top 50 targeted accounts is the number that Cisco has anticipated as of now and this highlights a massive chance for Cisco to use its competency in an all-pervasive business concept. The company's current product line that essentially includes switches and routers besides other networking equipment has attained reasonable level of maturity in the market, making it tough for the company to generate exponential growth.

On cloud nine

Cisco's cloud networking platform, Meraki, is another silver lining that will positively impact the company's revenue streams in future. Meraki grew 100% y-o-y and more than doubled its number of customers in the quarter. A good number of tech giants including Microsoft and Google have showcased the significance of cloud computing in the coming years and Cisco's leadership in networking space has helped it become a leading cloud infrastructure provider.

Final thoughts

The Wall Street punished Cisco after the results because investors could not foresee any valuable future opportunities for growth. While a credible argument is the stagnancy in the company's share price range, I believe that Cisco is a worthwhile investment for the undermentioned reasons:

· The "Internet of Everything" can turn out to be a massive option for the company to initiate a new line of operations and the fact that the management has been able to quantify the opportunity conveys reasonable optimism.

· Currently, Cisco is trading at a yield of 3.5% with its latest dividend increase. Additionally, the company's buyback policy is also a boon to its shareholders.

· On the basis of an EPS guidance for next quarter, Cisco's P/E works out to be a modest 11x, which makes it a significantly inexpensive leader and a strong buy.

Rating: 4.0/5 (1 vote)



Praveen Chawla
Praveen Chawla premium member - 3 years ago

Seems to be catch slogan for devices with a IP address but how is Cisco going to monetize it? Google seems to have got a head start with its acquistion of Nest.

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