Broadcom Corporation (BRCM), ARM Holdings plc (ADR) (ARMH): Is Cisco Systems, Inc. (CSCO) Really in Danger?

Page 1 of 2

Shares of Cisco Systems, Inc. (NASDAQ:CSCO) have traded down as much as 5% over the past couple days after reaching a new 52-week high of $21.98. Investors have grown concerned after Scott Thompson, an analyst of FBR Capital, cut his rating on the stock to “underperform.”

Cisco Systems, Inc. (CSCO)Thompson also cutt his price target to $17, which is almost 20% below current value, and said, “We believe Cisco will become increasingly more challenged to offset weaker-than-expected routing and switching demand as it works to transition to a more software and service-centric business model.”

Let’s not get carried away
I found those comments to be pretty odd. It suggests that Cisco Systems, Inc. (NASDAQ:CSCO) will be unable to adapt to new trends. In fact, adapting and evolving has been the company’s biggest strength over the past couple of years. Thompson’s research also concluded that “the next generation of network and data-center hardware will blur the boundaries between routing, switching, and computing, providing a single hardware platform on which network and computing functions will be delivered through software applications.”

Again, I have to disagree. I don’t think Thompson has studied Cisco’s recent performances. While he is correct by suggesting that Cisco’s routing and switching businesses have not performed up to their usual standards, the company has not been asleep at the wheel, either. As the hardware business has struggled, management has been investing heavily to shore up Cisco’s cloud position, while also picking off several companies that strengthen Cisco’s software-defined networking, or SDN, position.

Case in point: In Cisco’s first-quarter report, both routing and switching businesses dropped 2% sequentially and 3% year over year. In the second quarter, however, both hardware units went in opposite directions as switch revenue grew 3% year over year, while routing revenue shed more than 5%. Again, not exactly robust figures, but the company’s not concerned, and that’s for good reason.

Given Cisco’s acquisitions of Cariden, Meraki and BroadHop, Thompson should have been able to see that the company is phasing out its focus on hardware. Cisco Systems, Inc. (NASDAQ:CSCO) has not been investing to grow its hardware business. Besides, as Cisco’s evolution continues, hardware will eventually comprise of single-digit revenue, while the software, cloud, and SDN businesses grow.

It’s smart execution, especially since the margins in the hardware line haven’t been that impressive recently, at least not when compared to the company’s stronger growth businesses such as data center and wireless revenue, which grew in the quarter by 65% and 20%, respectively.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!