Cisco: Margin of Safety and the Internet of Things

Cisco is in a unique position to build the future of Internet connectivity without disrupting its profitability

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Aug 30, 2016
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Cisco (CSCO, Financial) builds the hardware that powers the Internet. In fact, most of the Internet runs through a Cisco device. Today, that’s a profitable business for the company and one it intends to keep growing.

At the beginning of the year, Cisco acquired Jasper Technologies, a platform to build applications for the Internet of Things, for $1.4 billion to integrate with the company’s cloud business unit. Currently, it has over 5,000 clients including Amazon (AMZN, Financial), Ford (F, Financial), Vivint (VSLR, Financial) and General Motors (GM, Financial).

Cisco CEO Chuck Robbins believes “this is bigger than the first wave of the Internet. It has to be.” This commentary comes following former CEO John Chambers’ comments that the Internet of Everything (circa 2014 language) “will be worth $19 trillion.” Of course this could just be a regurgitation of some top-tier consulting firm study. The bottom line is that the IoT market is set to be big.

Nelson Hsu has a good article on the Internet of Things.

What is IoT?

If you’re not familiar, the IoT links objects to the Internet, and there is a big push to create new ways to leverage the data from everything around us. The IoT has the potential to fundamentally change how the world works.

Cisco itself estimates that 50 billion devices will be connected to Internet of Things platforms by 2020, which will only grow in number. The connectivity will be made even easier by the introduction of 5G technology, which provides speeds that are a lot closer to the fixed broadband of today, even up to 7GB-per-second downloads.

Cisco is also tailoring its routing hardware for IoT applications and delivering IoT-specific routers for businesses; it’s even working with Intel (INTC, Financial), Ericsson (ERIC, Financial) and Verizon (VZ, Financial) to develop 5G routers. Get excited! The future is going to be amazing.

Business can focus on getting products to the marketplace and adapting to change faster, increasing efficiency and most importantly profit. This is why Cisco is the leader in the push for IoT devices and data management. The applications are virtually endless, but what’s really interesting is that this isn’t a startup; it’s a $160 billion company that pays out a 3.25% dividend and is priced like a blue chip.

Cisco's finances

In the last decade, Cisco has earned more than $76 billion after taxes, bought back over 1.1 billion shares and increased its revenue from $28 billion to north of $50 billion. While three times sales seems like you’re paying a lot, at 15 times earnings Cisco shares would be a bargain for a growth tech startup.

By the end of 2017, analysts predict EPS will hit $2.40 and book value will increase to $13.80 a share. These figures are based on small earnings growth year over year and the company continuing to decrease total common shares outstanding down to 5 billion.

Latest news

Cisco posted earnings of 57 cents in the last quarter on $12 billion in sales with gross margins of 65.2%. Router sales were 5% lower year over year; Switching was off 3%; Enterprise business fell 2%; Commercial grew 8%; Public sector was up 6%. The company announced a restructuring plan that will eliminate 5,500 jobs, about 7% of its workforce, because it is attempting to make room for strategic investments in areas that are actually growing. Going forward, management expects the next quarter to be flat to up 3%.


There is a ton of big money in Cisco. Outside of Vanguard, BlackRock and State Street, the big hedge fund managers collectively own over 200 million shares, with John Burbank (Trades, Portfolio) and Jim Simons (Trades, Portfolio) making new purchases, and Joel Greenblatt, Jeremy Grantham (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and First Pacific Advisors all increasing their positions.


This is the tough part. Cisco is up 16% year to date and 21% over the last 52 weeks. It’s sitting at a five- and 10-year high. Not a normal bargain basement play, but sitting on the sidelines and waiting for a better price may not be the right thing to do at this point.

With a growing net income figure and shrinking share base, the EPS could see $5 a share over the next five to 10 years. This would put the stock in the $75 to $80 range, or higher with multiple expansion. You can expect the dividend to increase as well, which should only add to the list of why investors will own the stock.

Disclosure: I have no position in CSCO.

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