I'm beginning to get emails from frustrated Cisco (CSCO) investors complaining that the company has gotten boring. The stock has not moved fast enough for some. While this may be true, the company has nonetheless been moving very rapidly. And patient investors will be rewarded handsomely as Cisco appears to be smarter than its peers.
For that matter, given that the stock is still trading at such a discount to the likes of F5 Networks (FFIV) and Juniper (JNPR) when assessing their P/E ratios, the network giant seems farther ahead than what most analysts are projecting in their models. This company is strategically positioning itself for the type of growth not seen since the dot-com era. For this optimism, there are several major catalysts.
The new growth drivers
The first reason to get excited about Cisco's prospects has to do with the company's $12 billion in operating cash flow, which has helped Cisco amass more than $46 billion in cash. The company's cash position is important to note here because quite a bit of my assumptions are based on future free cash flow projections.
In that regard, when applying a modest 3% to 4% FCF growth above 2012 levels, it supports a $30 fair market value. Meanwhile, it seems that the market is discounting this metric in favor of top line growth. So, at minimum, the stock is already undervalued by 44%. But management understands that revenue growth is important.
To that end, Cisco has acquired several companies to help drive the top line. These include paying $141 million in cash for Cariden, another $1.2 billion for Meraki and most recently, the company acquired BroadHop, a provider of next-generation policy control and service management technology for carrier networks. This highlights how Cisco plans to leave no stone unturned to produce the growth investors crave.
What's more, the cloud market is expected to grow to $177 billion over the next couple of years. Essentially, the company is demonstrating how it plans to use its capital in ways that increase shareholder value and its market share. But Cisco is not done doing these types of deals, which is why I recently suggested that the company should pick off F5 Networks.
Cisco has been averaging 6% revenue growth over the past couple of years. The fact that management recently guided for only 3.5% growth was a small clue that it plans to continue its shopping spree to grow the top line.
More mobile, more data, more demand
The second reason is the continued surge in mobile devices. This will spur increased demand not only in network bandwidth, but also in data traffic as the size of the data is expected to grow exponentially. There is not a better traffic cop on the market than Cisco. A recent study projects smartphone usage on a global scale will only continue to explode upward.
Couple this with Cisco's own recent survey regarding data traffic over the next several years; it's hard to imagine how this stock will not double from this level.
The third reason, but certainly not least, is that the Street has quickly forgotten that Cisco acquired NDS, a provider of content streaming and security software to help expand its next-generation video services.
Essentially, Cisco now has the capability to deliver TV content to a variety of devices. Cisco correctly anticipated that the growing popularity in mobile devices would force content providers to adjust for mobile, including video. Now, with sites like YouTube and Netflix (NFLX) and the increasing need for TV anywhere with streaming services like HBOGo, Cisco seems better positioned to be able to deliver that volume of traffic.
Here's making sense
Cisco does not get enough credit on Wall Street for being a bit smarter than everyone else. With the stock trading at $20, Cisco is arguably the cheapest stock on the market. Probably the best reason to believe in Cisco is that the company continues to show that it believes in itself. And based on cash flow projections and sales trends, which includes 22% aggregate growth in services, as I've said before, this stock is worth (at least) $30 per share.