If you have not watched Cisco (CSCO) over the last couple years, it may be time to do that as the networking maker continues to astound investors with its performance and transition process that will only make the company stronger and more profitable. Over the last couple years, the company has invested more than $6 billion on software-related companies to ignite growth in new areas. It is systematically transitioning (through acquisition) and moving into software and cloud computing. Software is the main player for Cisco as it re-invents itself to become the one-stop-shop supplier of informational technologies.
This is not new as the company has been transitioning for some time now. But how profitable it will be is unknown yet. As it continues to rebrand itself, Cisco CEO John Chambers cautions patience as starting with a low base takes time to materialize:
"We are moving rapidly to software ... 13 of the 14 acquisitions were software, cloud" companies, which have recurring revenue streams that are "very predictable. The bad news is when you start from a low base - it takes you a while to get to a size where it really becomes material."
Its router/switch business has been in regression as of late. In its recent fourth quarter report, the revenue from its router/switch business accounted for just under half of its revenue. Understanding the "writing on the wall," Cisco has been broadening its base beyond the router/switch market revamping its image. A six percent decline in revenue (Y o Y) for routers proves that the company is making smart moves. Router revenue declines, but revenue growth grew overall by five percent.
Should Cisco Revisit Palo Alto Networks?
Would it have an adverse affect upon Cisco if Palo Alto were picked up by Oracle (ORCL) or even F5? So far, Cisco has shown that it is willing to leave no stone unturned to find growth opportunities - regardless of how much it cost. And this is one more it needs to make. Having tried to buy the company before it went public, I am sure it should take another look. The company had its IPO earlier this year and the stock has run until recently. For the period ending October, the company grew revenues 50% year-over-year to $85.9 million. With an increasing customer base, and no debt, the company is very attractive. The company would be very attractive for Cisco which has been scooping up cloud based companies.
Is Cisco a Bargain?
Can Cisco be one of the best bargains on the market? I believe one can see how sharp the company is. As its core routing and switch business continues to erode, it transitions, spending a good portion of its $45 billion in cash on software acquisitions. The transition may take some time but it can already be felt. Its routing business is now 1% less of Cisco's overall sales. Hardware margins are that great so margins will continue to look good as it transitions.
Beating earnings estimates eight consecutive times, this transition is working. Cisco does not look like it is going to slow down. The next quarter growth is expected to be 4 percent to 6 percent. Longer term, the cloud will be amazing for Cisco as companies migrate totally into the cloud. The one-stop-shop service will be a great benefit to the company.
There is little doubt that the stock appears to have reached a peak position and looks like it will move down now. This can be seen in the long negative divergence that can be observed in both the RSI indicator and the MACD. When both of these indicators support each other, it is a pretty strong sign. The MACD histogram has yet to move above the "0" line since the beginning of the year. Recently, the stock has moved below the middle Bollinger Band and I would expect the middle band to turn into resistance if it is to continue down.